Contribution margin is the part of a selling price left over after variable costs, and it is what each sale contributes towards fixed costs and then profit. It differs from gross margin because it separates costs by behaviour rather than by function: only costs that move with volume count as variable, so factory rent stays out even though it is a production cost.
The distinction matters for every decision that changes volume. Whether to accept a discounted order, drop a product line, or run an extra shift depends on contribution, not on fully absorbed cost. As long as an order contributes something positive and does not displace better work, it improves the position even if it looks unprofitable after overhead is allocated.
The ratio is the more portable figure. Contribution per unit answers questions about a single product, while the contribution margin ratio, contribution divided by price, tells you what share of any revenue increase reaches the bottom line. That single percentage drives break-even analysis and operating leverage alike.
The formula
price- Selling price per unit
variable cost- Cost that moves with each unit sold
contribution- price − variable cost
fixed costs- Costs that do not change with volume in the period
How to use this calculator
- Enter the selling price of one unit.
- Enter the variable cost of that unit — materials, direct labour, commission, shipping.
- Enter the units you expect to sell and your fixed costs.
- The gauge shows the contribution margin ratio; the per-unit and total figures sit below.
Worked examples
A product at 45 with 27 of variable cost
Contribution is $18.00 per unit, a ratio of 40.0%. Across 3,000 units that is $54,000 of total contribution, which covers $40,000 of fixed costs and leaves $14,000 of operating profit.
Judging a discounted order
An order at $32.00 per unit looks poor against a full cost of $40.33 once fixed costs are allocated. But it still contributes $5.00 per unit, so 500 such units add $2,500 of profit provided they do not displace full-price sales.
How to read your score
Frequently asked questions
How is contribution margin different from gross margin?
Gross margin subtracts all production costs, fixed and variable. Contribution margin subtracts only the costs that change with volume. A factory lease appears in cost of goods sold but not in variable cost.
Which costs count as variable?
Anything that rises with the next unit: raw materials, packaging, per-unit labour, sales commission, payment processing and delivery. Salaried staff, rent and insurance do not.
Why does the ratio matter more than the per-unit figure?
Because it scales. A 40% ratio means forty pence of every extra pound of revenue reaches the operating line regardless of product mix, which is what break-even and operating leverage calculations need.
Should I ever accept an order below full cost?
If it contributes positively, does not cannibalise better business and does not reset customer price expectations, then yes — the fixed costs are being incurred either way. Persistent below-cost selling is a different problem.
Contribution reference
| Selling price | variable $10 | variable $15 | variable $20 | variable $27 | variable $40 |
|---|---|---|---|---|---|
| $20 price | 50.0% | 25.0% | 0.0% | -35.0% | -100.0% |
| $30 price | 66.7% | 50.0% | 33.3% | 10.0% | -33.3% |
| $45 price | 77.8% | 66.7% | 55.6% | 40.0% | 11.1% |
| $60 price | 83.3% | 75.0% | 66.7% | 55.0% | 33.3% |
| $100 price | 90.0% | 85.0% | 80.0% | 73.0% | 60.0% |
Negative values mean the unit loses money before any fixed cost is considered.
| Fixed costs | Break-even units | Break-even revenue at $45 | Units for $25,000 profit |
|---|---|---|---|
| $10,000 | 556 | $25,020 | 1,945 |
| $25,000 | 1,389 | $62,505 | 2,778 |
| $40,000 | 2,223 | $100,035 | 3,612 |
| $60,000 | 3,334 | $150,030 | 4,723 |
| $100,000 | 5,556 | $250,020 | 6,945 |
| $180,000 | 10,000 | $450,000 | 11,389 |
Break-even units are fixed costs divided by contribution per unit, rounded up.