Contribution Margin
The amount each unit sold contributes toward covering fixed costs and profit.
Formula
Variables
Example
$50 price − $30 variable = $20 CM
How it works
Contribution margin is the amount of money left from each sale after paying the costs that change directly with that unit, such as materials, packaging, or sales commissions. Because fixed costs stay the same whether you sell one unit or many, this leftover amount is what helps cover those fixed costs and, after that, becomes profit. The formula works by isolating the part of the selling price that is available to support the business beyond the unit-level variable cost.
When to use it
Use this when you want to judge whether a product, service, or order is generating enough money to help cover fixed expenses. It is especially useful for pricing decisions, break-even analysis, and comparing the profitability of different items.
Worked example, step by step
Selling price per unit = $84 Variable cost per unit = $57 Contribution margin = Price - Variable cost Contribution margin = $84 - $57 Contribution margin = $27 per unit Interpretation: each unit sold contributes $27 toward fixed costs and then profit.
Common mistakes to avoid
- Subtracting fixed costs instead of variable costs
- Using total revenue and total expenses when the formula is per unit
- Treating contribution margin as profit without first covering fixed costs
Did You Know?
Once fixed costs are covered, every additional unit’s full contribution margin drops straight to profit.
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More in Business & Commerce
View allSelling Price from Markup
BasicThe price to charge after adding a percentage markup to unit cost.
Discounted Price
BasicThe final price after applying a percentage discount to the list price.
Sales Tax
BasicThe amount payable once a sales-tax or VAT rate is added to the price.
Revenue
BasicTotal income from sales before any costs are deducted.
Contribution Margin Ratio
IntermediateContribution margin expressed as a fraction of the selling price.
Break-Even (Units)
IntermediateThe number of units that must be sold to exactly cover all costs.