Contribution Margin

Contribution margin equals price minus variable costs. It is a cost accounting concept and a fundamental principle of business. Most often used to identify the amount of dollars to offset fixed costs of operations. Although simple in concept, it’s formula can get convoluted as it is applied towards more complex production systems.

Fixed Costs – Explanation and Examples

Fixed Costs

‘Fixed costs’ is a business term used mostly in cost accounting. It has several meanings based on its usage. The most common definition associated with fixed costs is expenses that must be paid regardless of production or sales volume. The best example is rent for a company. It doesn’t matter whether you produce or sell one widget or several thousand, the rent must still be paid.

So why is it important to understand fixed costs?  How is it used in cost accounting and in financial reporting?  Finally, what are examples of fixed costs? 

Alcohol Costs – Monitor Closely

Alcohol Costs

In the restaurant business, alcohol is the single best margin generator. If you are going to have a profit, this is where the money is made. As an owner, you need to understand the value of alcohol sales and the associated costs. This aspect of operations not only generates high contribution margins, it covers its share of costs and ultimately adds to the bottom line. 

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