How to Figure Out the Contribution Margin

The contribution margin lets you know how profitable it is to sell an item.

Contribution margin is an important figure for any business engaging in sales. It helps managers forecast potential profit and to set prices. The contribution margin is also known as the gross profit. It is the sales price received minus all the variable costs. Many managers will set prices based on the contribution margin they hope to realize from each item. Contribution margins also help managers identify which product is more profitable, allowing them to plan marketing and promotions.

Instructions

1. Record the total sale price of an item.

2. Determine all the variable costs of an item and the price involved in selling it. This includes the cost to manufacture a good or generate a service, shipping, packaging, postage and wages. Calculate only those wages that are directly related to the specific good. For example, if you are calculating the cost of selling a customer service seminar, you will need to include the fee for the presenter.

3. Add all of the variable costs together.

4. Subtract the variable costs from the total sales price. The difference is the contribution margin.

5. Multiply the contribution margin by 100 and divide it by the sales price to obtain a contribution ratio.

References

• Thomsen Business: Contribution Margin - An Example
• BizWiz Consulting: Contribution Margin and Contribution Margin Ratio