Contribution Margin Calculator
Answers the Question
Does it make sense to produce more?
Calculator for Contribution Margin
What Is the Contribution Margin?
The contribution margin measures the financial benefit of increased production.
All things being equal, the higher the value of the contribution margin, the more it makes sense to produce additional items. This, of course, is only true as long as the contribution margin remains greater than zero.
Why Is it Important?
- Many producers are tempted to cut production whenever they are taking a loss. This is often a mistake.
- Consider the case of a manufacturer that owns a factory. The factory is a huge drain on resources, but is required to stay open for contractual reasons.
- Even if production isn't enough to cover the cost of real estate taxes, security, and other costs, it may help compensate for some of them.
- As long as a the money coming in covers the marginal cost of production, a firm should probably consider continuing.
Formula(s) to Calculate Contribution Margin
- CONTRIBUTION MARGIN = (SALES REVENUE - VARIABLE COSTS)
Common Mistakes
- Not considering that increased quantity of production may affect the price that the market is willing to pay for the good being produced.
- Not understanding which costs are really fixed costs and which are really variable costs. While a factory may be a fixed cost,
- Ignoring optional fixed costs when determining whether to produce a new product line. The additional overhead required for production of a specific unit may be over and above the fixed costs of doing nothing. For instance, A factory may cost $1 million dollars per year, but the production of a given item may also require specialized training for a new product line.