What Is Contribution Margin? Formula, Calculation & Example

The contribution margin shows how much a product contributes to covering your fixed costs after deducting variable costs. It answers a simple but critical question: does enough remain after direct costs to pay rent, salaries and other fixed expenses?

Contribution margin formula

Contribution margin = Revenue - variable costs

Variable costs include all directly attributable expenses per unit sold: material costs, shipping, packaging, transaction fees. Fixed costs like rent or salaries are deliberately excluded.

Practical example

You sell a product for €50. Variable costs: purchase price €20, packaging €2, shipping €5, transaction fees €1.50 = €28.50. Your unit contribution margin is €21.50. Selling 200 units per month gives you €4,300 to cover fixed costs.

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