Business & pricing
Contribution margin: Definition, Formula and Example
Contribution margin is revenue minus variable costs, showing the amount available to cover fixed costs and then profit.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Unit contribution; Contribution margin ratio.
How it works
Unlike gross profit, which uses the accounting cost-of-goods-sold classification, contribution margin separates costs by behavior. Some production overhead can be fixed, and some selling costs can be variable. Define the relevant sales volume and period before comparing ratios.
Unit contribution = unit price − unit variable cost; contribution margin ratio = contribution / revenue
Revenue and variable costs must cover the same activity and period. Contribution is not net profit while fixed costs remain unpaid.
A $40 sale with $24 variable cost
Assume 100 identical sales and $1,000 fixed costs.
- Unit contribution: $40 − $24 = $16.
- Contribution ratio: $16/$40 = 40%.
- Total contribution: 100 × $16 = $1,600; operating profit: $1,600 − $1,000 = $600.
Contribution is $16 per unit, but profit after the included fixed costs is only $600 in total.
Constant price and variable cost; no other costs or taxes.
Try these example inputsContribution margin is not always gross margin
A cost can be a selling expense and still be variable, while manufacturing overhead can be fixed. Using the wrong cost definition can distort break-even even when the percentage arithmetic is correct.
Explore with a calculator
- Break-Even Calculator
Inspect unit contribution and the contribution margin ratio before comparing sales targets.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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