What is the purpose of determining the contribution margin

Contribution margin represents the incremental profit generated for each product/unit sold and is computed as the selling price per unit minus the variable cost per unit. Also called as dollar contribution per unit, the measure indicates how a particular product contributes to the overall profit of the company.

Beyond the fixed cost(s), the contribution margin helps determine the selling price range of a product, the profit levels that can be expected from the sales, and structuring the sales commissions paid to sales team members, distributors or commission agents. Contribution margin constitutes the basic block for break-even analysis for overall costing of a product.

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