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The difference between sales and variable cost is called contribution. Contribution margin is the relationship between contribution and sales. It indicates the portion of amount for fixed expenses. The contribution margin approach to calculate the break-even point (i.e. the point of zero profit or loss) is based on the Cost Volume Profit (CVP) analysis concepts known as contribution margin and contribution margin ratio. Contribution margin is the difference between sales and variable costs. When calculated for a single unit, it is called unit contribution margin. Contribution margin ratio is the ratio of contribution margin to sales.
The decline in the ratio indicates that product is losing the market; it may be due to general obsolescence that occurs during the life cycle of the product.
