Contribution Margin
The difference between sales revenue and variable costs, showing how much of each sales dollar contributes to covering fixed costs and generating profit.
Contribution Margin
The difference between sales revenue and variable costs, indicating how much of each sales dollar is available to cover fixed costs and contribute to profit after variable costs are paid.
For example, if a product sells for $80 and has variable costs of $30 (materials, direct labor, commissions), its contribution margin is $50 or 62.5% of the sales price, meaning each unit sold contributes $50 toward covering fixed costs and generating profit.
Contribution margin can be expressed as a dollar amount per unit, a total dollar amount, or as a percentage (contribution margin ratio). It’s a key concept in cost-volume-profit analysis, break-even calculations, and product line decisions. Products with higher contribution margins are generally more profitable to promote when capacity constraints exist. Understanding contribution margin helps managers evaluate pricing strategies, assess the impact of volume changes, and make decisions about product mix, special orders, and production prioritization.