What is contribution margin?
Contribution margin shows how much each sale contributes toward fixed costs and profit. It is the base of cost-volume-profit (CVP) analysis, break-even analysis and many managerial accounting decisions.
The formulas
Worked example
A product sells for $50 and costs $30 in variable costs. The contribution margin is $20 per unit, a 40% ratio. Selling 1,000 units gives a total contribution margin of $20,000. After $12,000 of fixed costs, operating income is $8,000.
Frequently asked questions
What is contribution margin?
Contribution margin is sales minus variable costs. It is the amount left to cover fixed costs and then provide profit.
What is a good contribution margin ratio?
Higher is better: it means more of each sales dollar is left after variable costs. What counts as good depends on the industry and on how large fixed costs are.
How is contribution margin different from gross margin?
Gross margin subtracts cost of goods sold, which includes fixed manufacturing costs. Contribution margin subtracts all variable costs, including variable selling costs, and no fixed costs.