Definition
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.