Question 1

What is contribution margin?

Accepted Answer

Contribution margin is the selling price minus variable costs per unit. It represents how much each unit sold contributes toward covering fixed costs and generating profit. A higher contribution margin means more money available for fixed costs and profit.

Question 2

How is contribution margin ratio calculated?

Accepted Answer

The contribution margin ratio is the contribution margin per unit divided by the selling price, expressed as a percentage. A 60% ratio means 60 cents of every dollar of revenue goes toward covering fixed costs and profit.

Question 3

How does contribution margin help with pricing?

Accepted Answer

If your contribution margin is too low, you may not cover fixed costs. Use it to set minimum prices, evaluate discounts, and decide which products to promote. Products with higher contribution margins generate more profit per sale.

Contribution Margin Calculator

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