See Also:
Margin vs Markup
Segment Margin
Marginal Costs
Segmenting Customers for Profit
Financial RatiosContribution Margin
Contribution margin is equal to selling price minus variable cost. The amount leftover, the contribution, covers
fixed costs or is profit. Contribution margin is used to measure the profitability of a product and can be expressed as a dollar amount per unit or as a ratio. Contribution margin can be calculated for a product line using total revenues and total variable costs, or it can be calculated at the unit level, using unit sales price and unit variable cost. The metric is commonly used in cost-volume-profit analysis and
break-even analysis.
Contribution Margin FormulaContribution Margin = Unit Price - Unit Variable CostContribution Margin Ratio FormulaThe contribution margin ratio, or contribution margin percentage, is the contribution margin expressed as a percentage of the unit sales price. It is calculated as follows:
Contribution Margin Ratio = (Unit Price - Unit Variable Cost) / Unit Price Contribution Margin Format Income StatementThe contribution margin format
income statement is a variation on the standard income statement that separates variable costs and fixed costs. It starts with revenues, subtracts variable costs, and then displays the contribution margin, as well as, the contribution margin percentage before subtracting fixed costs and giving the net operating income. A simplified contribution margin format income statement might look like this:
Revenue $100,000
Variable costs
Raw material $15,000
Variable labor $20,000
Delivery charge $5,000
Total variable costs $40,000
Contribution margin $60,000
Contribution margin percentage 60%
Fixed costs
Rent $25,000
Utilities $5,000
Wages $20,000
Total fixed costs $50,000
Net operating income $10,000