Contribution margin analysis

Contribution margin analysis is a relatively simple tool afforded by cost/volume/profit analysis. In simplest terms, the contribution margin is total revenue minus total variable cost. This difference can be expressed as a percentage of total revenue. A company's contribution margin can be expressed as the percentage of each sale that remains after the variable costs are subtracted. Given the contribution margin, a manager can make better decisions about whether to add or subtract a product line, about how to price a product or service, and about how to structure sales commissions or bonuses. The contribution margin is computed using a special type of income statement that has been reformatted to group together a business's fixed and variable costs.