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Simple English definitions for legal terms
contribution margin
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A quick definition of contribution margin:
Contribution margin is the money left over after you sell a product and subtract the cost of making it. This money can be used to pay for things like rent, salaries, and other expenses, or it can be kept as profit. It's like having a lemonade stand: if you sell a cup of lemonade for $1 and it costs you 50 cents to make, your contribution margin is 50 cents. This means you have 50 cents to cover your expenses or keep as profit.
A more thorough explanation:
Definition: Contribution margin is the amount of money left over from a product's selling price after deducting its cost of production. It represents the funds available for profit and payment of fixed costs.
Example: Let's say a company sells a product for $50, and it costs $30 to produce. The contribution margin would be $20 ($50 - $30). This means that for every unit sold, the company has $20 available to cover its fixed costs and make a profit.
Another example could be a restaurant that sells a burger for $10, and it costs $5 to make. The contribution margin would be $5 ($10 - $5). This means that for every burger sold, the restaurant has $5 available to cover its fixed costs and make a profit.
The contribution margin is an important metric for businesses because it helps them understand how much money they have available to cover their fixed costs and make a profit. By analyzing the contribution margin, businesses can make informed decisions about pricing, production, and profitability.