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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.

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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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