Finance
Contribution margin
Contribution margin is revenue minus variable cost and shows how much a product contributes to fixed costs and profit.
Also known as
CM
Direct answer
What is Contribution margin?
Contribution margin is revenue minus variable cost and shows how much a product contributes to fixed costs and profit. Inventory decisions should not be prioritized by revenue alone. A stockout on a high-margin SKU can be more damaging than one on a higher-revenue low-margin item.
Formula
Contribution margin = net revenue − variable cost
Practical example
A product sells for 80 euros and has 46 euros of variable cost. Its contribution margin is 34 euros.
What teams should remember
Contribution margin is revenue minus variable cost and shows how much a product contributes to fixed costs and profit.
Inventory decisions should not be prioritized by revenue alone. A stockout on a high-margin SKU can be more damaging than one on a higher-revenue low-margin item.