Incremental margin
The change in a specified profit measure divided by the change in revenue over a stated comparison. Name the profit measure and cost boundary; incremental margin is not necessarily the same as the average margin.
Incremental margin in round numbers
Hypothetical annual comparison with constant prices and product mix: baseline cost of goods sold (COGS) is 69.5% of revenue, and 90% of that COGS varies proportionally with revenue. Variable COGS is therefore 69.5% × 90% = 62.55% of revenue. Each additional revenue dollar contributes 37.45 cents before other variable costs, assuming fixed costs do not change. This is incremental gross contribution under the stated boundary, not necessarily operating-profit margin.
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| Measure | Basis / result |
|---|---|
| Baseline COGS / revenue | 69.5% |
| Variable share of COGS | 90% of COGS, not revenue |
| Variable COGS / revenue | 69.5% × 90% = 62.55% |
| Incremental gross contribution / added revenue | 100% − 62.55% = 37.45% |
| Assumptions | Constant price/mix, proportional variable COGS, unchanged fixed costs |
Terms Related to Incremental margin
Operating leverage · Contribution margin · Fixed costs · Variable costs · Economies of scale · All of the glossary