Contribution Margin
Definition
Revenue less variable costs, the amount each additional sale contributes toward fixed costs and then profit. The basis of break-even analysis: fixed costs divided by contribution margin per unit gives the volume needed to break even.
Related Terms in Financial Analysis
Fixed Costs
Costs that do not vary with output over the relevant range, such as rent, insurance and salaried staff. They create operating leverage, so profit rises faster than revenue once they are covered and falls faster when volume drops.
Variable Costs
Costs that move more or less in proportion to volume, such as materials, per-unit labour, packaging and payment processing fees. Subtracting them from revenue gives contribution margin.
Accounts Payable Turnover
Total purchases or cost of sales divided by average accounts payable, showing how many times a year the business settles its supplier balances. A falling ratio can signal either deliberate cash conservation or genuine payment strain.
Days Payable Outstanding (DPO)
The average number of days a business takes to pay its suppliers, calculated as average accounts payable divided by cost of sales, times the days in the period. Stretching DPO funds working capital but risks supplier relationships and early-payment discounts.
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