Every Sale Has a Job
After you pay the direct cost of delivering one more unit, whatever remains has one job: help cover your fixed costs, then become profit. That remainder is the contribution margin.
The Formula
Contribution Margin = Price − Variable Cost per Unit
Contribution Margin Ratio = (Price − Variable Cost) ÷ Price
Worked Example
| Item | Value |
|---|---|
| Price | $80 |
| Variable cost | $32 |
| Contribution margin | $48 |
| Contribution margin ratio | 60% |
Each sale contributes $48 toward fixed costs. If fixed costs are $4,800/month, you need 100 sales to break even — exactly the break-even logic from our break-even guide.
Using It for Decisions
- Add a product? Compare its contribution margin ratio to existing lines. A higher ratio means more profit per revenue dollar.
- Take a discount client? As long as price > variable cost, the deal adds contribution — useful in slow periods to cover fixed costs.
- Drop a line? Only if its contribution doesn't cover the fixed costs it uniquely triggers.
Gotcha: A positive contribution margin does not guarantee profit. You still must clear total fixed costs. Contribution margin tells you about the next unit, not the whole business.
Contribution Margin vs Gross Margin
Gross margin allocates overhead across products; contribution margin does not. For "should I say yes to this?" questions, contribution margin is cleaner because it reflects what actually changes when you accept the work.