What this calculator does
Contribution margin is what is left from the selling price of one unit after only the variable costs of making or delivering it are subtracted, the costs that rise and fall directly with volume, such as materials or a per-unit shipping fee. It is the amount each additional unit sold contributes toward covering fixed costs and, beyond that, toward profit.
The distinction people miss is contribution margin versus gross margin. Gross margin typically subtracts the full cost of goods sold, which can include some fixed manufacturing overhead allocated per unit. Contribution margin strips that back further, to variable costs only, which is why it is the figure used for break-even analysis and short-run pricing decisions rather than for reporting overall profitability.
The formula
Subtract the variable cost per unit from the selling price per unit to get the contribution margin per unit. Dividing that by the selling price gives the contribution margin ratio. If fixed costs are entered, dividing fixed costs by the contribution margin per unit gives the number of units that must be sold to break even.
| Term | Meaning |
|---|---|
| Contribution margin | Selling price minus variable cost per unit: what each unit contributes before fixed costs. |
| Variable cost | Costs that scale with each unit produced or sold, such as materials, packaging or a per-unit commission. |
| Fixed costs | Costs that stay the same regardless of volume, such as rent or a manager’s salary, used only for the break-even figures here. |
| Break-even units | The number of units where total contribution margin exactly covers fixed costs, with zero profit or loss. |
The inputs explained
| Field | What to enter |
|---|---|
| Selling price per unit ($) | The selling price of one unit. |
| Variable cost per unit ($) | The variable cost of producing or delivering one unit, excluding any fixed overhead. |
| Units sold (0 to skip) | Units sold over the period, if you want a total contribution margin figure. Leave at 0 to skip. |
| Total fixed costs (0 to skip) ($) | Total fixed costs for the same period, if you want the break-even point. Leave at 0 to skip. |
When to use it
Pricing a new product
Before fixed overheads are even considered, contribution margin shows whether a proposed price covers the direct cost of making the product with enough left over to be worth stocking at all.
Working out how many units to break even
Entering total fixed costs alongside price and variable cost shows the sales volume needed before the product starts contributing actual profit, rather than just covering its own variable costs.
Comparing two products on shelf space
A product with a lower contribution margin ratio needs to sell in higher volume to justify the same shelf or production capacity as one with a higher ratio.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How the contribution margin ratio changes with variable cost, at a $50 price
A $50 unit price against a range of variable costs.
| Variable cost per unit | Contribution margin per unit | Contribution margin ratio |
|---|---|---|
| $10 | $40.00 | 80.0% |
| $20 | $30.00 | 60.0% |
| $30 | $20.00 | 40.0% |
| $35 | $15.00 | 30.0% |
| $40 | $10.00 | 20.0% |
| $45 | $5.00 | 10.0% |
How the break-even point changes with fixed costs
A $20 contribution margin per unit (price $50, variable cost $30), against a range of fixed cost levels.
| Fixed costs | Break-even units |
|---|---|
| $5,000 | 250 units ($12,500.00 revenue) |
| $10,000 | 500 units ($25,000.00 revenue) |
| $15,000 | 750 units ($37,500.00 revenue) |
| $20,000 | 1,000 units ($50,000.00 revenue) |
| $30,000 | 1,500 units ($75,000.00 revenue) |
| $50,000 | 2,500 units ($125,000.00 revenue) |
Questions
Is contribution margin the same as gross margin?
No. Gross margin usually subtracts the full cost of goods sold, which can include allocated fixed manufacturing overhead. Contribution margin subtracts only the costs that vary with volume, which is why the two figures differ for the same product. For a cost-of-goods-sold based figure, see the margin calculator.
What counts as a variable cost versus a fixed cost?
A variable cost changes in step with units produced or sold, such as raw materials, packaging or a per-unit sales commission. A fixed cost stays roughly the same regardless of volume over the period being measured, such as rent, insurance or a salaried manager. Some costs are mixed and need judgement to split.
What is a good contribution margin ratio?
It depends entirely on the industry and cost structure; a service business with low variable costs can run a ratio above 70%, while a low-margin retailer might sit well under 30%. Compare against your own history or direct competitors rather than a fixed benchmark.
Why can break-even units come out as a fraction?
The exact break-even point is rarely a whole number of units. This calculator rounds up, since selling a fractional unit is not possible and rounding down would leave fixed costs still uncovered.
For a cost-of-goods-sold based margin instead of a variable-cost one, see the margin calculator. For total dollar profit after every cost, see the profit calculator.