What is contribution margin?

Contribution margin is a measure of a company's profitability that shows how much revenue is left over after covering variable costs associated with producing and selling a product or service. It is calculated by subtracting variable costs from revenue. Contribution margin is used to analyze the profitability of individual products or services and to make decisions about pricing, production levels, and product mix.

Contribution margin is the excess of sales revenue over variable costs. It is expressed as either a percentage of sales revenue or as an amount per unit sold. The contribution margin is important because it shows how much of each sales dollar is available to cover fixed costs and provide a profit.

Formula:

Contribution Margin = Sales Revenue - Variable Costs

Percentage Contribution Margin:

Percentage Contribution Margin = (Contribution Margin / Sales Revenue) x 100%

Unit Contribution Margin:

Unit Contribution Margin = Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit