Short answer
Contribution margin per unit = price − variable cost; ratio = contribution ÷ price. $65 price and $24.50 variable cost give $40.50 (62.31%), so break-even revenue is $12,500 ÷ 0.6231 = $20,062.
1. The formulas
- Contribution margin per unit = price − variable cost per unit
- Contribution margin ratio = contribution per unit ÷ price
- Break-even revenue = fixed costs ÷ contribution margin ratio
2. Worked example
Price $65, variable cost $24.50, fixed costs $12,500.
| Item | Calculation | Result |
|---|---|---|
| Contribution per unit | $65 − $24.50 | $40.50 |
| Contribution margin ratio | $40.50 ÷ $65 | 62.31% |
| Break-even revenue | $12,500 ÷ 0.6231 | $20,061.73 |
| Break-even units | $12,500 ÷ $40.50 | 309 (rounded up) |
3. Contribution margin vs gross margin
Gross margin subtracts the cost of goods sold, which can include fixed production costs. Contribution margin subtracts only variable costs of every kind, including variable selling costs such as card fees and commissions.
| Illustration on $100,000 of sales | Amount | Margin |
|---|---|---|
| Variable costs (materials $30,000 + fees and commissions $8,000) | $38,000 | |
| Contribution margin | $62,000 | 62% |
| Fixed production cost counted in COGS | $12,000 | |
| Gross margin (sales − $30,000 materials − $12,000 fixed production) | $58,000 | 58% |
4. Why it matters
- It is the amount each sale contributes toward fixed costs and then profit.
- A higher ratio lowers break-even and makes profit grow faster once you pass it.
- Operating leverage = total contribution ÷ operating income.
Try your own figures in the Break-Even Calculator.
5. Frequently asked questions
What is contribution margin?expand_more
The amount left from each sale after variable costs, available to cover fixed costs and profit.
How do I calculate contribution margin ratio?expand_more
Divide contribution per unit by the selling price: (price − variable cost) ÷ price.
Is contribution margin the same as gross margin?expand_more
No. Gross margin subtracts cost of goods sold, which may include fixed production costs; contribution margin subtracts only variable costs.
What is a good contribution margin?expand_more
It depends on the business. Higher is better because break-even falls as the ratio rises.