Contribution Margin

Concept

What Is Contribution Margin?

Contribution margin (CM) is the amount remaining from sales revenue after variable expenses are deducted. It contributes toward covering fixed costs and then toward profit.

Example

Per Unit CM

Selling price = $50, Variable cost per unit = $30. Contribution margin per unit = $50 - $30 = $20. Each unit sold contributes $20 toward fixed costs and profit.

Concept

CM Ratio

CM Ratio = Contribution Margin / Sales Revenue. Using the example above: $20 / $50 = 40%. This means for every $1 of sales, $0.40 goes toward covering fixed costs.

Key Point

Contribution Margin Income Statement

Sales − Variable Expenses = Contribution Margin − Fixed Expenses = Net Operating Income. This format groups costs by behavior rather than by function, and is essential for CVP analysis.

Cost Behavior: Fixed, Variable & Mixed

Break-Even Analysis

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Practice Questions