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Contribution Margin

Contribution margin is an economic indicator that companies can use to calculate profit before tax. In this article we explain the definition, the calculation and which companies have a particularly high contribution margin.

Contribution Margin Formula: How is the contribution margin calculated?

Contribution margin is an important metric that companies use to determine how profitable their products or services are. The contribution margin formula is relatively simple: it is net profit divided by sales revenue. If you want to calculate contribution margin, you need two numbers: net profit and sales revenue. Net profit is the profit the company earns after taxes. The sales revenue is all the income that the company earns from the sale of its products or services.

The contribution margin formula is: net profit / sales revenue = contribution margin

If the result of the contribution margin formula is a number greater than 1, it means that the company makes more than one euro in profit for every euro sold. If the result of the contribution margin formula is a number less than 1, it means that the company makes less than one euro in profit for every euro sold. The contribution margin can also be used to determine how much revenue a company needs to generate to cover its costs. To do this, simply divide your total costs by the contribution margin.

Example: A company has costs of 100,000 euros and a contribution margin of 2. This means that for every euro sold, the company generates 2 euros in profit. To cover its costs, the company must generate 50,000 euros in sales (100,000 / 2 = 50,000).

Is Margin and Contribution Margin the same thing?

No, margin and contribution margin are not the same thing. Margin is the profit a company makes per unit sold. Contribution margin, on the other hand, is the percentage of a company's sales that are covered by margin. Most companies strive to achieve the highest possible margin. Nevertheless, one should not underestimate the importance of the contribution margin. If the contribution margin is negative, it means that the company has spent more money selling products than it has earned from the products sold. This can have fatal consequences, as the company could fall into debt and ultimately go bankrupt. To avoid negative effects of the contribution margin, you should always make sure that your company has a positive or at least neutral contribution margin.

Examples: Companies with high contribution margin

A company with a high contribution margin often also has other positive characteristics, such as low debt or a good growth rate. However, the contribution margin does not necessarily have to be positive - it is also possible for a company to have a negative contribution margin despite positive characteristics.

Some companies have a high contribution margin, which enables them to survive in difficult times. These companies are often very successful and can sustain themselves in the future.

Some examples of companies with high contribution margins are:

  1. Apple
  2. Google
  3. Amazon
  4. Facebook

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