Profit ratios at your fingertips
Recall which profitability ratio to use for contribution, product margin, operating performance, and ROE driver diagnosis.
Pure recall What does contribution margin tell you? Think variable costs first. Revenue left after variable costs. Use it for break-even, short-run pricing, product mix, and constrained capacity decisions. Compare Gross margin or contribution margin? If the decision changes volume, price, or mix, contribution usually leads. Objection The gross margin is healthy, so the channel is profitable. A stakeholder uses gross margin to approve a channel with heavy support load. Your line Gross margin is the first layer. For this channel decision, we also need contribution after commission and support cost. Do not say gross margin is useless; it is…
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