Business Glossary
What Is Contribution Margin?
Contribution margin is selling price minus variable direct costs. It shows exactly how much each sale contributes towards covering fixed overhead and generating profit.
The Formula
Contribution Margin = Selling Price − Variable Direct Costs
Worked Example — UK SME
A UK manufacturer: product sells for £85. Variable costs: materials £28, direct labour £14, packaging £3, freight £5. Total variable cost = £50. Contribution margin = £35 per unit (41.2%).
UK Benchmark
📊 Contribution margin should exceed zero for every product sold. Negative contribution margin products must be repriced or discontinued immediately — there is no volume at which they become profitable.
Common Questions
What is the difference between contribution margin and gross margin?
Gross margin may include some fixed direct costs. Contribution margin includes only truly variable costs that change with each unit sold.
How do I use contribution margin for pricing?
If contribution margin is £35 per unit and monthly fixed costs are £42,900, you need 1,228 units to break even. Any units above this generate profit at £35 each.
Can contribution margin be negative?
Yes — if variable costs exceed the selling price. Each unit sold then increases the loss. There is no level of volume that makes a negative contribution margin product profitable.
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