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Contribution Margin

What is the Contribution Margin? Definition and meaning

The contribution margin is used to cover fixed costs within a company. In cost and performance accounting (CPA), it is calculated from the difference between revenue (i.e. turnover) and variable costs. The formula for the contribution margin is:

Contribution Margin = Revenue – Variable Costs

Revenue:

Revenue consists of the sales volume multiplied by the price.

Variable Costs:

These are costs that depend on the volume of production, e.g. energy, raw materials, etc.

Fixed Costs:

Fixed costs are costs that remain constant, such as rent, depreciation, etc.

When Contribution Margin = Fixed Costs:

The company makes neither a profit nor a loss. Income and expenditure are in balance. Also known as the “break-even point”.

When Contribution Margin > Fixed Costs:

The company makes a profit, as income exceeds expenditure.

When Contribution Margin < Fixed Costs:

Expenditure exceeds income. The company is making losses.

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Frequently asked questions

How is the contribution margin calculated?
The contribution margin is calculated as the difference between revenue and variable costs. Revenue is the sales volume multiplied by the price, while variable costs depend on the volume of production.
What is the break-even point?
The break-even point is reached when the contribution margin exactly equals the fixed costs. At that point the company makes neither a profit nor a loss; income and expenditure are in balance.
How do I keep track of contribution margin and costs within a project?
With project controlling from projectfacts, revenue and costs are recorded continuously, so you can evaluate the profitability of each project.