Contribution Margin
Revenue minus variable cost.
What does Contribution Margin mean?
Contribution margin is the amount remaining from sales revenue after deducting variable costs. It represents how much each unit sold contributes toward covering fixed costs and generating profit. A higher contribution margin means each sale is more profitable, giving the business greater flexibility to cover overhead and invest in growth.
How to calculate Contribution Margin
Contribution margin is calculated as: Contribution Margin = Price per Unit − Variable Cost per Unit. The contribution margin ratio is: (Contribution Margin / Price per Unit) × 100. For example, if a product sells for $50 and costs $20 in variable costs, the contribution margin is $30 per unit, and the ratio is 60%. To find break-even units, divide total fixed costs by the contribution margin per unit.
FAQ
A "good" contribution margin ratio varies by industry. Manufacturing companies often target 30–40%, while software and service businesses may see ratios of 70–90% due to lower variable costs. The key is that the margin must be high enough to cover fixed costs and leave a profit.
Contribution margin only subtracts variable costs from revenue, showing how much each unit contributes to covering fixed costs. Profit margin subtracts all costs (both variable and fixed) from revenue, showing the overall profitability of the business. Contribution margin is a per-unit metric, while profit margin is typically calculated on total revenue.
Yes. A negative contribution margin means the variable cost per unit exceeds the selling price — you lose money on every unit sold. In this situation, selling more units only increases losses. You need to either raise prices or reduce variable costs before the product can become viable.
Contribution margin shows the minimum price at which a product is worth selling. If the contribution margin is positive, each additional unit sold helps cover fixed costs. This insight helps businesses set prices, evaluate discount strategies, and decide which products to prioritize in their product mix.
Variable costs change in proportion to production or sales volume. Common examples include raw materials, direct labor, packaging, shipping, sales commissions, and payment processing fees. Costs like rent, salaries, and insurance are fixed costs and are not included in the contribution margin calculation.
Related calculators
- Break-Even— Point where revenue equals cost.
- Profit Margin— Profit as percentage of revenue.
- ROI— Return relative to investment cost.
- Burn Rate— Monthly spending rate.