Glossary
Contribution margin
Definition
Contribution margin is price minus variable cost per unit: what each sale contributes toward fixed costs and profit. The contribution margin ratio divides it by price; a 40% ratio means $40 of every $100 in sales covers fixed costs and profit.
How contribution margin works
It drives break-even and target-profit analysis.
Products with higher margins deserve more selling effort, all else equal.
Why it matters to a firm
It teaches owners to price and choose products well.
Questions about contribution margin
Is it the same as gross margin?
Not exactly; gross margin uses COGS, which may include fixed production costs.
What's a good ratio?
It varies by industry.
Why does it matter?
It shows what each sale adds.
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Related terms: Break-even point
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