Original subtitles

Contribution margin allows us to calculate

the profitability of our product even at the unit level.

It is based on the number of units that are being sold.

Remember, not the number of orders.

To calculate the contribution margin,

we take the difference between the revenue and the variable costs.

So let's go ahead and do that.

So this is just the difference between the revenue and the variable costs.

If you want the contribution margin at the unit level,

you just divide that difference by the number of goods sold.

So, let's go ahead and do that.

So that would be total revenue minus variable cost over number of goods sold.

So this tells you per unit sold how much is the contribution margin.

In this example, we can see that the contribution margin is less than three dollars.

To pay for overhead costs,

we need to get as close as possible to this to $2.94 magic number to break even.

This can even help in making decisions about allocating limited resources,

directing the funds to more profitable product lines.

For example, a grocery store like Target would typically have

a low contribution margin because it works with large quantity of types of products.

So they can make up their profits for

the share quantity of their sales across a wide range of products.

In other words, if one product has low contribution margin,

another has a higher contribution margin,

and that way they can make up for any loss on the item with the low contribution margin.

On the other hand, imagine an online store that

only sells very high-end fashion products.

They, on the other hand, will have a high contribution margin per item

as they have fewer sales in comparison to the products being sold at Target.

So this online fashion store needs to make sure each sale counts.

So that is the broad idea of contribution margin.