How to calculate net income using contribution margin is a critical financial analysis technique that calculates a company’s profit by considering its variable costs and sales volume. For instance, a clothing retailer can calculate net income by deducting variable costs, such as raw materials and labor, from its sales revenue and then subtracting fixed costs, such as rent and salaries.
This method is relevant as it provides valuable insights into a company’s profitability and efficiency. It aids in pricing strategy development, cost control improvement, and financial planning. Its historical roots can be traced back to the 1930s, when contribution margin analysis emerged as a tool for businesses to assess their financial performance during the Great Depression.
