In variable costing, contribution margin is total revenues less all of the variable costs manufacturing, selling, and administrative of the product. Contribution margin can be viewed as the amount of “revenue” left to deal with fixed costs and profit after all variable costs are covered. Usually, it is understood that managers have more control over their contribution margin than their fixed costs. That is, they are able to change their sales prices, sales volume, and variable costs (i.e., increasing/decreasing sales prices, producing and selling more/less products, changing vendors for raw materials, etc.) than alter their fixed costs. This does not mean that fixed costs cannot be altered. It means that the contribution margin is more controllable.
Managers must consider whether or not to accept special orders, whether to discontinue/continue particular services, how to price products and services, among other things. Low contribution margin is when variable expenses are more when compared to the revenues. Selling expenses and increase in manufacturing costs, in addition to high or excessive inventories of products can lead to low contribution margin. In addition low revenues or decrease in sales or the total number of units sold. Thus low contribution margin can be due to the increase in cost of selling a product or service or it can be due to fall in revenues.
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