What Is Contribution Margin?
Formula, ratio, and how it differs from gross profit.
Home › Accounting Glossary › Contribution Margin
| Per unit | Selling price − Variable cost per unit |
|---|---|
| Ratio | Contribution margin ÷ Sales × 100 |
| Topic | Management accounting · Decision making |
Contribution margin in plain English
Every sale first pays its own variable costs. What is left “contributes” to the fixed costs. Once the fixed costs are covered, the rest is profit.
Worked example
Selling price is 50 and variable cost is 30 per unit.
Contribution per unit = 50 − 30 = 20. Contribution margin ratio = 20 ÷ 50 = 40%.
Selling 1,000 units gives a total contribution of 20,000. If fixed costs are 20,000, profit is zero. That is the break-even point.
- Confusing it with gross profit. Contribution margin deducts only variable costs. Gross profit deducts the cost of goods sold, which can include fixed production overheads.
Frequently asked questions
What is the difference between contribution margin and gross margin?
Contribution margin subtracts only variable costs. Gross margin subtracts the full cost of goods sold, which may include fixed production costs.
How is contribution margin used in decisions?
For pricing, choosing which products to promote, and deciding whether to accept a special order.
What is the contribution margin ratio?
Contribution margin divided by sales, shown as a percentage.
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This page is for general learning. Accounting rules vary by country and standard.