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Chapter 19. Analyzing Contributions and ... > Calculating the Contribution Margin

Calculating the Contribution Margin

All firms have costs that are directly associated with their product or service. One of the most powerful means of understanding and controlling those costs is contribution margin analysis. The contribution margin itself is calculated by subtracting the variable costs required to manufacture the product from the revenue achieved by selling that product.

Variable costs are those that change as production levels rise and fall. For example, the cost of raw materials is a variable cost because the more goods you manufacture the more raw materials you need. In contrast, fixed costs are those that do not change along with differences in production levels. For example, the cost of salaried workers is a fixed cost.


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