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What is Contribution Margin?

Contribution margin measures how efficiently a company can produce a good relative to its variable cost.

Goods with high contribution margins are the most profitable. The contribution margin can be helpful in deciding what goods can go on sale and for how much, and it allows management to decipher how to improve efficiency in production while keeping variable costs low.

Additionally, if there is a bottleneck in the supply chain for an input that is used to produce two different products, management could use contribution margin to decide which product takes takes priority.

Keywords: margin, variable costs, contribution margin, bottleneck, profitability,