Use contribution margin for short-run choices

Contribution margin is the sales price less variable cost. It tells you what a sale contributes toward fixed costs and profit. What it is good for Use contribution margin when the decision is short-run and fixed costs are already committed. Special orders, temporary discounts, product mix under idle capacity, and accept-or-reject decisions often need this lens. What it is not good for Contribution margin is not a license to price below full cost forever. In the long run, capacity, equipment, engineering support, and supervision all need funding. Contribution margin is a short-run decision tool, not a complete strategy. The critical…

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