Contribution Margin
Revenue per unit left to cover fixed costs.
Formula
Variables
Example
Covers fixed costs then profit
How it works
Contribution margin is the amount of money from each unit sold that remains after paying the variable cost of that unit. It matters because that leftover amount is what can go toward covering fixed costs like rent, salaries, and insurance, and only after those are covered does the business start making profit. The formula works by subtracting the cost that changes with each sale from the selling price, isolating the unit’s contribution to overall overhead and profit.
When to use it
Use this when analysing product profitability, pricing, or break-even point calculations. It is especially useful in businesses that sell many units and need to know how much each sale really contributes after direct variable expenses.
Worked example, step by step
A company sells custom notebooks for $18 each. Variable cost per notebook (materials, printing, packing) = $11 Contribution margin = Price - Variable Cost Contribution margin = $18 - $11 Contribution margin = $7 per notebook This means each notebook sold contributes $7 toward fixed costs and profit.
Common mistakes to avoid
- Subtracting fixed costs instead of variable costs
- Using total costs for all units rather than cost per unit
- Confusing contribution margin with net profit, which also includes fixed costs
Did You Know?
Contribution margin reveals how much each sale contributes toward covering fixed costs and profit.
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