Contribution Margin Definition
The contribution margin is the sales price per unit minus the variable costs per unit. The contribution margin can be used to measure the profitability of a company’s products and services.
The contribution margin definition can be applied to both manufacturing and service companies. In a manufacturing company, the contribution margin would be the sales price per unit minus the direct materials cost, labor cost, and variable overhead costs. In a service company, the contribution margin would be the sales price per unit minus the variable costs of labor and overhead.
The contribution margin can also be used to calculate the breakeven point for a company. The breakeven point is the number of units that must be sold in order to cover all of the fixed costs of production. The formula for calculating the breakeven point is: Fixed Costs / Contribution Margin.
For example, if a company has fixed costs of $100,000 and a contribution margin of $10 per unit, then the company would need to sell 10,000 units in order to break even.
