Contribution Margin Ratio

The formula to determine the contribution margin of a business.

Contribution margin ratio formula

The contribution margin (CM) of a business is equal to the revenue less all variable costs. It represents the marginal benefit of producing one more unit.

CM ratio = (total revenue – cost of goods sold – other variable expenses) / total revenue

​See an example in Excel here.

Example calculation

A company has revenue of $50 million, cost of good sold is $20 million, marketing is $5 million, product delivery fees are $5 million and fixed costs are $10 million.

Contribution margin dollars = $50M – $20M – $5M – $5M = $20 million

Contribution margin ratio = $20M / $50M = 40%

The fixed costs of $10 million are not included in the formula, however, it is important to make sure the CM dollars are greater than the fixed costs, otherwise the company is not profitable.

Breakeven analysis

Contribution margin is not necessarily a good indication of economic benefit.  Companies may have significant fixed costs that need to be factored in.

It can be important to perform a breakeven analysis  to determine how many units need to be sold and at what to breakeven.  To learn more, check out our Financial Analysis course.

​In order to perform this analysis, calculate the contribution margin per unit, then divide the fixed costs by this number and you will know how many units you have to sell to break even.

i.e. Building on the above example, suppose that company sold 1 million units.  That means the CM per unit is $20.  Fixed costs are $10 million so the company has to sell 500,000 units to breakeven. ($10 million / $20 per unit = 500,000).

More learning

To learn more about other types of financial analysis you may want to check out:

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