Blog · Finance metrics and formulas
The contribution margin ratio is revenue minus variable costs, divided by revenue. This page gives the three formulas (amount, per unit and ratio), which costs count as variable, a worked example on four products with the Excel formula, the contribution margin income statement beside the traditional layout, break-even and target-profit revenue from the ratio, and why product mix moves the blended ratio.
The contribution margin ratio is revenue minus variable costs, divided by revenue: the share of each sales dollar left to cover fixed costs and profit. Four products with revenue of $1,620,000 and variable costs of $1,062,000 contribute $558,000, a ratio of 34.4%. With fixed costs of $420,000, break-even revenue is about $1,219,000.
Contribution margin = Revenue − Variable costs
Contribution per unit = Price − Variable cost per unit
Contribution margin ratio = Contribution margin / Revenue = Contribution per unit / Price
The amount is in dollars, the per-unit figure is in dollars per unit, and the ratio is a percentage. Contribution margin in the glossary has the short definition, including the per-customer form used in customer profitability. OpenStax's managerial accounting text defines the ratio as "the percentage of a unit's selling price that exceeds total unit variable costs", and the Corporate Finance Institute writes the company version as (total revenue − cost of goods sold − any other variable expenses) / total revenue.
One row per product, with units sold, price and variable cost per unit. A cost is variable if it rises and falls with volume:
| Variable (in contribution) | Fixed (below contribution) |
|---|---|
| Materials and purchased goods | Rent and occupancy |
| Direct labor paid per unit or per hour worked | Salaried staff |
| Sales commission | Systems and software subscriptions |
| Freight out to customers | Depreciation |
| Card and payment fees | Insurance |
The test is what would change if one more unit were sold, or one fewer. Cost of goods sold is not the same thing: it can hold fixed factory overhead, and it leaves out variable selling costs such as commission and freight out.
One year, in USD. Contribution per unit in D2 is =B2-C2 and the unit ratio in E2 is =D2/B2, filled down.
| Product | Price (USD) | Variable cost per unit (USD) | Contribution per unit (USD) | CM ratio | Units | Revenue (USD) | Variable costs (USD) | Contribution (USD) |
|---|---|---|---|---|---|---|---|---|
| P1 | 120 | 72 | 48 | 40.0% | 4,000 | 480,000 | 288,000 | 192,000 |
| P2 | 80 | 56 | 24 | 30.0% | 6,000 | 480,000 | 336,000 | 144,000 |
| P3 | 250 | 140 | 110 | 44.0% | 1,200 | 300,000 | 168,000 | 132,000 |
| P4 | 40 | 30 | 10 | 25.0% | 9,000 | 360,000 | 270,000 | 90,000 |
| Total | 34.4% | 1,620,000 | 1,062,000 | 558,000 |
P1 step by step: 120 − 72 = 48 a unit, and 48 / 120 = 40%. Across 4,000 units that is 192,000 of contribution. The total ratio is 558,000 / 1,620,000 = 34.4%. With price in B2:B5, variable cost in C2:C5 and units in F2:F5, one cell gives it:
=SUMPRODUCT(B2:B5-C2:C5,F2:F5)/SUMPRODUCT(B2:B5,F2:F5)
The total ratio must equal the unit ratios weighted by each product's share of revenue. P1 and P2 are each 480,000 / 1,620,000 = 29.6% of revenue, P3 is 18.5% and P4 is 22.2%:
| Product | Revenue share | CM ratio | Share × ratio |
|---|---|---|---|
| P1 | 29.6% | 40.0% | 11.85 |
| P2 | 29.6% | 30.0% | 8.89 |
| P3 | 18.5% | 44.0% | 8.15 |
| P4 | 22.2% | 25.0% | 5.56 |
| Total | 100.0% | 34.44 |
The weighted sum is 34.4%, the same as total contribution over total revenue. The simple average of the four ratios is (40 + 30 + 44 + 25) / 4 = 34.75%, which is wrong because it gives P3's 300,000 of revenue the same weight as P1's 480,000. Also tie revenue to the ledger, and total variable costs to the cost accounts you classified as variable.
The same year, laid out two ways. Variable costs of 1,062,000 split into 900,000 of variable production cost and 162,000 of commission and freight out; fixed costs of 420,000 split into 150,000 of fixed production overhead and 270,000 of fixed selling and administrative cost.
| Contribution format | USD | Traditional format | USD |
|---|---|---|---|
| Revenue | 1,620,000 | Revenue | 1,620,000 |
| Variable costs | 1,062,000 | Cost of goods sold (900,000 + 150,000) | 1,050,000 |
| Contribution margin | 558,000 | Gross profit | 570,000 |
| Fixed costs | 420,000 | Operating expenses (162,000 + 270,000) | 432,000 |
| Operating profit | 138,000 | Operating profit | 138,000 |
Operating profit is the same 138,000 both ways. What differs is the middle line: gross profit is 35.2% of revenue, contribution 34.4%, because the traditional layout puts fixed factory overhead above the line and commission below it. OpenStax notes the contribution format is "used for internal purposes and is not shared with external stakeholders": published statements under US GAAP use the traditional layout. Gross profit margin covers what belongs in cost of goods sold.
Break-even revenue = Fixed costs / CM ratio
Revenue for a target profit = (Fixed costs + Target profit) / CM ratio
Break-even units (one product) = Fixed costs / Contribution per unit
Break-even revenue is 420,000 / 0.3444 = 1,219,355; in Excel, =420000/(558000/1620000). Check: 1,219,355 × 558,000 / 1,620,000 = 420,000 of contribution, exactly the fixed costs. For an operating profit of 200,000, revenue must reach (420,000 + 200,000) / 0.3444 = 1,800,000. If P1 were the only product, break-even would be 420,000 / 48 = 8,750 units.
Double P4's volume to 18,000 units, with every price and unit cost unchanged. Revenue rises by 360,000 and contribution by 90,000:
| Before | After | |
|---|---|---|
| Revenue (USD) | 1,620,000 | 1,980,000 |
| Contribution (USD) | 558,000 | 648,000 |
| CM ratio | 34.4% | 32.7% |
| Operating profit (USD) | 138,000 | 228,000 |
| Break-even revenue (USD) | 1,219,355 | 1,283,333 |
Profit rose by 90,000, yet the blended ratio fell from 34.4% to 32.7% and break-even revenue rose by 64,000, because the extra sales carry a 25% ratio. A falling ratio is not always bad news; it can be a mix story, and the contribution in dollars says which.
At customer level more costs turn variable: delivery drops, order handling, sales visits, rebates and returns all depend on how a customer buys. Contribution per customer is gross margin less that cost to serve, which gross margin vs contribution margin vs net margin sets out and contribution on ten accounts works line by line. To build the cost side, see how to calculate cost to serve per customer in Excel.
Contribution by product is the first cut; contribution by customer shows which accounts pay toward fixed costs. Covirage's tools compute contribution per product and per customer from your ledger, delivery and order exports, allocating costs by what each customer does and reconciling to the cost pools; the external AI model explains the ranking and never does the arithmetic. See customer profitability. For how to split costs into the two kinds, see fixed vs variable costs, and for contribution per customer, see unit economics.
Gross margin takes off cost of goods sold, which can include fixed production overhead. Contribution margin takes off every variable cost, including variable selling costs such as commission and freight out, and no fixed costs. Contribution is the better guide to short-term decisions.
It depends on the business: software and services often run high ratios, distribution and manufacturing lower. What matters is that total contribution covers fixed costs with room for profit, and how the ratio moves with mix and price.
Subtract the variable cost of one unit from its selling price. A product selling at 120 with variable costs of 72 contributes 48 a unit toward fixed costs and profit.
Yes. If a product sells for less than its variable cost, each extra unit sold increases the loss. That is a signal to reprice, cut variable cost or stop selling it, unless it drives other profitable sales.