Based on your evaluation, you can decide to improve its profitability by increasing the product's price or reducing the variable production costs. While you shouldn't use variable margin to determine the company's overall profitability, you can use it to assess the profitability of a particular item and determine how best to improve its profitability. Because of this, it's best to adjust its current sales price level. For example, when you have a low or negative variable margin, it means your product or business may not be as profitable as you hoped. You can use variable margin to help examine variable production costs. Here are some ways in which calculating the variable margin proves beneficial: Helps make pricing decisions You can use variable margin to make more strategic decisions regarding the prices of your goods and services. Related: What Is Contribution Margin and How To Calculate Why should you calculate the variable margin? While variable margin accounts for a product's variable costs, it doesn't account for any associated fixed costs. What is variable margin?Īlso known as the variable contribution margin or contribution margin, the variable margin refers to the margin that results from subtracting variable production costs from revenue. In this article, we define variable margin, list the steps for calculating it and explain the difference between variable margin and gross margin. Doing so can help you set prices more strategically and in a manner that benefits your business in the long run. Before you decide on the selling price of a product, it's helpful to calculate the variable margin.
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