What Is Contribution Margin? Formula, Ratio and Break-Even
By SimplyCPA · 11 October 2026
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- Meaning: Contribution margin = Sales − Variable costs — what each sale contributes to fixed costs and then profit.
- Ratio: Contribution margin ÷ Sales.
- Break-even: Fixed costs ÷ contribution margin per unit (in units), or ÷ the ratio (in sales dollars).
- Versus gross margin: Contribution margin separates costs by behaviour (variable costing); gross margin uses absorption costing.
- Uses: Special orders, product mix under a constraint, margin of safety and operating leverage — tested in BAR.
Definition
Contribution margin is sales revenue minus variable costs. It's the amount left over from each sale to "contribute" toward covering fixed costs — and, once those are covered, toward profit.
The formulas
- Contribution margin = Sales − Variable costs
- Contribution margin per unit = Selling price per unit − Variable cost per unit
- Contribution margin ratio = Contribution margin ÷ Sales
Worked example
A company sells a product for $50. Variable costs (materials, direct labour, sales commission) are $30 per unit. Fixed costs are $200,000 a year.
- Contribution margin per unit = $50 − $30 = $20
- Contribution margin ratio = $20 ÷ $50 = 40%
Break-even analysis
- Break-even in units = Fixed costs ÷ Contribution margin per unit = $200,000 ÷ $20 = 10,000 units
- Break-even in sales dollars = Fixed costs ÷ Contribution margin ratio = $200,000 ÷ 40% = $500,000
- Units for a target profit of $60,000 = ($200,000 + $60,000) ÷ $20 = 13,000 units
Target after-tax profit: convert it to pre-tax first. A $42,000 after-tax target at a 30% rate is $42,000 ÷ (1 − 0.30) = $60,000 pre-tax.
Contribution margin vs gross margin
Gross margin (sales minus cost of goods sold) uses absorption costing, so it includes fixed manufacturing overhead and excludes variable selling costs. Contribution margin uses variable costing: it separates costs by behaviour, not by function. That's why contribution margin is the right tool for short-term decisions.
Where it's used
- Special orders: accept if the price exceeds variable cost and there's spare capacity.
- Product mix with a constraint: rank products by contribution margin per unit of the scarce resource (such as machine hours), not per unit sold.
- Margin of safety: actual sales minus break-even sales — how far sales can fall before a loss.
- Operating leverage: contribution margin ÷ operating income. Higher leverage means profit swings more with sales.
On the CPA Exam
Cost-volume-profit analysis and variable costing appear in the Business Analysis and Reporting (BAR) Discipline section; see also our financial statement analysis notes.