Contribution Margin
The amount remaining from revenue after variable costs, available to cover fixed costs.
Definition
Contribution margin is revenue minus variable costs. It represents what each sale "contributes" toward covering fixed costs and generating profit. Once you sell enough units for contribution margin to cover fixed costs, you've reached break-even; sales beyond that contribute to profit.
Contribution margin can be expressed per unit (price minus variable cost per unit) or as a ratio (contribution margin ÷ revenue). Higher contribution margins mean fewer sales are needed to break even.
Why It Matters
Contribution margin is fundamental to break-even analysis and pricing decisions. Knowing your contribution margin tells you how many units you need to sell to cover fixed costs, and how much profit each additional sale generates.
Comparing contribution margins across products or services reveals where to focus sales efforts. Products with higher contribution margins generate more profit per sale.
Examples
- 1
A product sells for $100 with $40 variable cost. Contribution margin is $60 per unit or 60%. Each sale contributes $60 toward fixed costs.
- 2
With $120,000 annual fixed costs and $60 contribution margin per unit, break-even is 2,000 units.
- 3
Product A has 70% contribution margin, Product B has 40%. Sales should focus on Product A for maximum profit impact.
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