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A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in contribution margin
The contribution margin is the sum of money needed by a company to pay its variable expenditures, cover its fixed costs, and contribute to net profit or loss. Additionally, it assesses if a product is making enough money to cover its fixed costs and calculates its profit margin. It is possible to determine the contribution margin in terms of money, units, or percentage.
The costs that remain constant are called fixed costs. These costs can change, but they generally remain the same. Rent for a building, insurance, salary, and utilities are a few examples of fixed costs (that are not directly related to production).
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