What Is Your Contribution Margin?

Businesses are concerned with profitability, and rightly so. If the business can't turn a profit, it can't stay in business very long! Calculating bottom line profitability is a fairly straightforward operation, but what about calculating the relative profitability of individual product lines or services? This is where things get complicated, and interesting!

Every product or service costs something to make or provide. There are fixed costs, such as machinery, tooling, and computers, as well as variable costs, like raw materials. These are fairly easy to measure and track for each product and service. But making different products or services also has additional costs, such as time (for setting up tooling and equipment to make a product, or for executing the tasks required for a service), as well as opportunity costs -- i.e. time and materials spent making this product are time and materials not spent making other products. So, how do you account for all that and determine which products and services net you the most profit?

Enter managerial accounting, which uses several processes to help you measure profitability in a variety of ways, including contribution margin and breakeven analysis. It turns out, accounting is pretty awesome!

Mark Butler, Virtual CFO

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