Contribution margin

Definition

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

Contribution margin = turnover - variable costs

Turnover:
Turnover is made up of the quantity sold multiplied by the price.

Variable costs:
Are costs which depend on the production quantity, e.g. energy, raw materials, etc.

Fixed costs:
Fixed costs are costs that always remain constant, e.g. rent, depreciation, etc.

If contribution margin = fixed costs:
The company makes neither a profit nor a loss. Income and expenditure are in equilibrium. Also called "break even point".

If contribution margin › fixed costs:
The company makes a profit in that revenues are higher than expenses.

If contribution margin ‹ fixed costs:
Expenses exceed revenues. The company makes losses.

Back to glossary