Contribution Margin

Contribution margin shows how much each unit contributes toward covering fixed costs and generating profit.

Core Formulas

• Contribution margin per unit = price − variable cost
• Contribution margin ratio = (price − variable cost) / price
• Total contribution = sales − total variable costs

Use the ratio to assess product mix and pricing; higher ratios generally improve profitability at a given volume.

Example

Price $60, variable cost $38.

• Contribution per unit = 60 − 38 = $22
• Contribution ratio = 22 / 60 = 36.67%

If 3,000 units are sold, total contribution = 3,000 × 22 = $66,000.

Step-by-Step

1. Determine unit price and variable cost per unit.
2. Compute unit contribution and the contribution ratio.
3. Multiply by volume to estimate total contribution.
4. Compare to fixed costs to estimate profit (Profit ≈ Total contribution − Fixed costs).

Sensitivity & Pitfalls

• Volume changes have linear impact only if variable cost and price remain constant.
• Discounts reduce price and margin; adjust the ratio accordingly.
• For multi-product lines, use weighted-average contribution based on mix.