What Is Operating Margin vs. Contribution Margin?

Investing News

An operating margin is a financial metric that research analysts frequently rely on to measure the money a company generates from sales, after subtracting the costs of production, such as wages and raw materials, but before paying interest or taxes. This differs from the contribution margin, which specifically measures the production costs for an individual product. While analysts study operating margins in an effort to gauge a company’s overall profitability, contribution margins are internally used to help companies source areas where they may strive to increase their profit margins on a granular basis.

Understanding Operating Margins vs. Contribution Margins

Operating margins show the profit margin that remains after deducting operating costs, including employee salaries, facilities costs, and monthly rent, as well as marketing and advertising costs. Contrarily, the contribution margin analyzes profitability on a product-by-product basis, specifically by examining the variable costs associated with each product, such as packaging materials expenses. If a certain product is significantly less profitable than a company’s other products, that company can attempt to carve out ways of reducing production costs for that item, or it may elect to raise its price point to boost the profit margin.

Articles You May Like

Acurx Pharmaceuticals to add up to $1 million in bitcoin for treasury reserve, following MicroStrategy’s playbook
It’s time now to focus on Nvidia, Treasury bonds and a bullish finish to 2024
Nvidia’s stunning 2024 return has all the makings of a stock-market dynasty
5 Moonshot Stocks to Buy for 2025 
Uber may use tech from Chinese autonomous-driving company Pony AI outside the U.S.: report