Contribution margin is revenue minus variable costs; as a ratio, it’s (Revenue − Variable Costs) ÷ Revenue, indicating how sales contribute to covering fixed costs and profit.
Contribution margin shows how much revenue remains after variable costs to contribute toward fixed costs and profit. It can be expressed in dollars or as a percentage (contribution margin ratio).
Per unit: Contribution per Unit = Price − Variable Cost per Unit
Example
If a product sells for $50 and variable cost per unit is $30, contribution per unit is $20 and contribution margin ratio is 40%.
Why it matters
Contribution margin is key for pricing, break-even analysis, and product mix decisions. It highlights the incremental profit from selling one more unit.
