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Finance: What is contribution margin? 12 Views


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Description:

When assessing the amount of profitability in a company’s various services and/or products, the contribution margin is a metric that is relied upon for calculation purposes. As a formula, it is a simple Sales minus Variable Costs equation. It is an important tool for gauging pricing. Companies that may be vulnerable due to an over reliance on 1-2 highly profitable products can find themselves in a cash crunch if one of the Variable Costs suddenly becomes more expensive and the company has a cap on how high in can raise prices without losing competitiveness with its rivals. A manager’s ability to reduce Variable Costs will increase the contribution margin and hopefully allow for increases in sales, and commensurate incentive bonuses.

Language:
English Language

Transcript

00:00

Finance a la shmoop... what is contribution margin, well, shmoop has spent a fortune

00:08

building the oh so fine content you digest and then mostly for free and you [Girl watching Shmoop videos]

00:14

could pay us if you wanted to..For years we've made no operating profit choosing

00:19

instead to roll any excess cash we found in our cigar boxes into building more

00:24

content so while our operating margins ie the cost of running the entire

00:29

business paying our writers, our clowns, our rent, our cloud storage facilities the [Clown bouncing on the spot]

00:34

office jester we have on retainer permanently to entertain the writers

00:39

have been low or nearly zero our contribution margins are really high

00:45

that is our cost of serving another thousand pages which you view hungrily

00:50

clicking on our ads thank you very much that cost to us is well something less [Person holding half a penny]

00:55

than a penny but we sell it to advertisers for a thousand page views

00:59

and about three bucks a unit there thousand pages for three bucks what a

01:03

deal so the contribution margin of that additional n plus one unit of our

01:08

product a thousand page views is extremely high like $2.99 divided by

01:14

three dollars or well over 99% contribution margin those are

01:19

our contribution margins here at Shmoop, very very high and not all companies [Man discussing contribution margins]

01:23

have such high contribution margins our sister company robot-date-eat-pray-

01:28

love which manufactures emotionally deep robots designed to take the place of [Emotional robot walking with a woman]

01:33

well you know special friends well they sell their robots for 15 grand each

01:39

but their cost of building that robots really high like 12 grand each no matter

01:44

how many robots they make so RDEPL carries a contribution margin of just 15

01:50

minus 12 or 3 grand / 15 grand or about 20 percent sorry all these numbers may

01:56

sound a bit tedious but if you're on a date with the robot they make for some

02:00

scintillating conversation [Girl sitting with robot on a date]

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