Contribution margin is revenue minus variable costs: the amount left to cover fixed costs and then profit.
Use it to understand how a sale contributes to the business before fixed overhead. Return to the business plan glossary for related terms.
Use the break-even calculator to turn contribution per unit into a sales target.
Formula and calculation
Contribution margin = Revenue − Variable costs
Unit contribution = Unit selling price − Unit variable cost
Contribution margin ratio = Contribution margin ÷ Revenue × 100
Identify costs that vary with activity over the relevant range, including variable selling costs where applicable. Split mixed costs on a supportable basis. Fixed salaries, rent and capacity steps do not automatically vary with each sale. Use net sales consistently and avoid dividing by zero revenue.
Worked example: illustrative figures
Illustrative example: North Stitch is a fictional accessories business. An illustrative product sells for $50 and incurs $20 materials, $5 variable production labour and $5 variable payment and fulfilment costs per unit. Monthly fixed costs are $6,000. Figures use one currency, USD or CAD, and assume unchanged price, mix and capacity.
| Item | Amount |
|---|---|
| Selling price per unit | $50 |
| Variable cost per unit: $20 + $5 + $5 | $30 |
| Contribution per unit | $20 |
| Contribution margin ratio | 40% |
| Monthly fixed costs | $6,000 |
Unit contribution is $50 − $30 = $20. The ratio is $20 ÷ $50 × 100 = 40%. Simplified operating break-even is $6,000 ÷ $20 = 300 units per month, or $15,000 revenue. At 400 units, contribution is $8,000 and the amount remaining after the stated fixed costs is $2,000, before any costs excluded from this model.
How to interpret the result
Contribution margin differs from gross margin because variable costs and cost of sales are different classifications. Gross margin may deduct fixed production overhead while contribution excludes it, and contribution may deduct sales commissions outside COGS. Neither measure is automatically net profit or cash flow.
Using this measure in a business plan
Use unit contribution to test pricing, discounts and marketing spend. For several products, use a supportable sales mix rather than applying one product’s contribution to the whole business. Model capacity limits, step costs and payment timing before treating a break-even volume as a viable cash plan.
For help connecting assumptions to the financial statements, see our financial modelling services and business plan writing services.
Related glossary entries
Frequently asked questions
Can contribution margin be negative?
Yes. If variable cost exceeds selling price, each additional sale reduces the amount available for fixed costs under the stated assumptions.
Is contribution margin the same as gross margin?
No. Contribution deducts variable costs; gross margin deducts defined cost of sales. The classifications may differ.
Does break-even guarantee enough cash?
No. The simplified calculation excludes payment timing, equipment purchases, financing and other cash requirements. Use it alongside a cash forecast.