Contribution Margin
The amount each unit sold contributes toward covering fixed costs and generating profit.
What You Need to Know
Contribution margin is the difference between selling price and variable costs. It's the profit available to cover fixed costs and, once those are covered, becomes pure profit.
Formula: Contribution Margin = Selling Price
- Variable Costs per Unit
Contribution Margin Ratio: CM Ratio = (Contribution Margin ÷ Selling Price) × 100
Example: Product Business
- Selling price: $50
- Variable costs: $20 (materials, shipping, payment fees)
- Contribution margin: $50 - $20 = $30
- CM ratio: ($30 ÷ $50) × 100 = 60%
What This Means:
- Every $50 sale contributes $30 toward fixed costs
- Once fixed costs are covered, each sale adds $30 profit
- 60% of revenue covers fixed costs and profit
Break-Even Analysis: Break-Even Point = Fixed Costs ÷ Contribution Margin
Sources & References
This information is sourced from authoritative government and academic institutions:
- sba.gov
https://www.sba.gov/business-guide/manage-your-business/accounting-bookkeeping
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