What is a contribution margin?

Definition: The contribution margin, sometimes used as a ratio, is the difference between a company’s total sales revenue and variable costs. In other words, the contribution margin equals the amount that sales exceed variable costs. This is the sales amount that can be used to, or contributed to, pay off fixed costs.

How do you calculate contribution margin?

Contribution margin (presented as a % or in absolute dollars) can be presented as the total amount, amount for each product line, amount per unit, or as a ratio or percentage of net sales. In terms of computing the amount: Contribution Margin = Net Sales Revenue – Variable Costs OR Contribution Margin = Fixed Costs + Net Income

What is the difference between contribution margin and Unit Contribution margin?

Contribution margin can be thought of as the fraction of sales that contributes to the offset of fixed costs. Alternatively, unit contribution margin is the amount each unit sale adds to profit: it is the slope of the profit line.