Contribution margin is what each sale contributes toward fixed costs and profit: price minus variable cost. As a ratio it tells you how much of every revenue dollar is left after the variable costs of making the sale.
The example
A $40 product with $25 variable cost.
| A | B | |
|---|---|---|
| 1 | Measure | Value |
| 2 | Price | $40 |
| 3 | Variable cost | $25 |
| 4 | CM / unit | $15 |
| 5 | CM ratio | 37.5% |
The formula
Margin and ratio:
How it works
Contribution margin isolates the variable economics of a sale:
- CM per unit = price − variable cost — the cash each unit throws off before fixed costs.
- CM ratio = CM ÷ price — the share of each revenue dollar that survives variable costs.
- Total contribution = CM per unit × units sold; once it exceeds fixed costs, you’re profitable.
- Break-even units = fixed costs ÷ CM per unit (see the break-even recipe).
CM, not gross margin. Contribution margin uses only variable costs; gross margin includes some fixed production costs. CM is the right tool for pricing, break-even, and “should I take this order?” decisions.
Try it: interactive demo
Set price and variable cost.
Variations
Total contribution
Across all units:
Break-even units
Cover fixed costs:
Required price for target CM%
Solve for price:
Pitfalls & errors
Variable costs only. Don’t fold fixed overhead into the variable cost, or the margin and break-even are wrong.
Divide-by-zero. A zero price makes the ratio error — guard with IFERROR if price can be blank.
CM ≠ profit. Contribution margin still has to cover fixed costs before any of it becomes profit.
Practice workbook
Frequently asked questions
How do I calculate contribution margin in Excel?
What's the difference between contribution and gross margin?
How do I find break-even units from contribution margin?
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