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Pricing & margin

Contribution margin calculator — per unit, ratio and by line

Calculate contribution margin per unit and as a ratio, split contribution across product lines, and see which line to push against a capacity constraint.

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Short answer

Contribution margin is selling price minus variable cost — the money each sale leaves behind to cover fixed costs. Per unit it is dollars; as a ratio it is contribution ÷ revenue. A $480 product with $312 of variable cost contributes $168 per unit, a 35.0% ratio. Across a three-line portfolio, $2,245,800 of contribution on $5,975,000 of revenue is 37.6%.

Contribution margin is the cleanest profitability number you have, because it only contains costs that actually move when you sell one more unit. Price minus variable cost, per unit and as a percentage of price. Everything else — rent, salaries, the ERP subscription — sits below the line where it belongs.

Enter price, variable cost and units for up to three lines. The calculator returns contribution per unit and per revenue dollar, total contribution by line with its share of the portfolio, what is left after fixed costs, and which line earns most from a shared constraint.

If you are trying to find the sales level that covers fixed costs, contribution per unit is the denominator you need — the break-even calculator does that step.

Your numbers

Line 1
$
$
min
Line 2
$
$
min
Line 3
$
$
min
$

Everything that does not move with volume: salaries, rent, depreciation, absorbed overhead.

Rank lines by

Result

Blended contribution margin
37.6%

$2,245,800 of contribution on $5,975,000 of revenue

Total revenue$5,975,000
Total variable cost$3,729,200
Total contribution margin$2,245,800
Weighted contribution per unit$76.91
After fixed costs$395,800
Break-even revenue at this mix$4,921,965
Constraint minutes consumed: 208,200 across 29,200 units.
LineCM/unitCM %ContributionShare$/min
Standard pump$168.0035.0%$705,60031.4%$9.33
Compact pump$69.0026.5%$662,40029.5%$7.67
Service kit$57.0060.0%$877,80039.1%$19.00
Standard pump contribution$705,600
Compact pump contribution$662,400
Service kit contribution$877,800
Standard pump: $480.00 − $312.00 = $168.00/unit = 35.0% of price
Contribution = Σ (CM/unit × units) = $2,245,800
Blended ratio = $2,245,800 ÷ $5,975,000 = 37.6%
Break-even revenue = $1,850,000 ÷ 37.586611% = $4,921,965
After fixed costs = $2,245,800 − $1,850,000 = $395,800
Contribution covers fixed costs with $395,800 left over. On contribution per constrained minute, push Service kit at $19.00/min; Compact pump is the line to reprice or requote. Break-even revenue at this mix is $4,921,965, so the mix itself is part of the answer.

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The formula

Contribution margin per unit = Price − Variable cost per unit · CM ratio = Contribution ÷ Revenue
Price
Net selling price per unit after discounts and rebates — not list price.
Variable cost per unit
Costs that move with each unit sold: materials, direct labour if it flexes, packaging, freight out, commission, card fees.
Revenue
Net revenue for the line: price × units sold.
Contribution
CM per unit × units. What is left to cover fixed costs and profit.

Contribution margin excludes all fixed and allocated costs. That is the whole point of it: fixed overhead does not change when you sell one more unit, so loading it into the unit cost hides which sales actually generate cash. Use the gross margin calculator when you need the reported, fully absorbed figure instead.

Worked example

Standard pump
$480 price · $312 variable · 4,200 units · 18 min/unit
Compact pump
$260 price · $191 variable · 9,600 units · 9 min/unit
Service kit
$95 price · $38 variable · 15,400 units · 3 min/unit
Period fixed costs
$1,850,000
Result
$2,245,800 contribution · 37.6% blended CM ratio · service kits win per constrained minute

The standard pump contributes $480 − $312 = $168 per unit (35.0% of price) and $705,600 in total. The compact pump contributes $69 per unit (26.5%) and $662,400. The service kit contributes only $57 per unit but that is 60.0% of price, and across 15,400 units it is the largest contributor at $877,800. Total contribution is $2,245,800 on $5,975,000 of revenue, a 37.6% blended ratio, leaving $395,800 after $1,850,000 of fixed costs. Rank by the constrained resource and the order changes again: $19.00 per minute for kits against $9.33 for the standard pump.

What contribution margin tells you that gross margin does not

Gross margin subtracts cost of goods sold, and in most ERP systems standard cost of goods sold already carries absorbed overhead — a machine-hour rate, a burden percentage, a share of the plant. That is right for financial reporting and wrong for a decision about one more order, because none of those costs change if the order lands. So the two numbers answer different questions: gross margin answers "what did we report?", contribution margin answers "what happens to cash if we take this?" A line with a 4% gross margin can be worth taking at 22% contribution when the plant is half idle, and worth refusing at the same 22% when the bottleneck is booked solid.

Contribution margin
The amount a sale contributes toward fixed costs and profit after its own variable costs are paid. Expressed per unit in currency, or as a ratio of net revenue. Fixed and allocated costs are deliberately excluded.

Which line to push: three ranking bases

"Which product is most profitable?" has three defensible answers and they often disagree. Pick the basis that matches what is actually scarce in your business. In the worked example the service kit ranks first on ratio and first per constrained minute, but last on contribution per unit — so the bottleneck decides the answer, not the price tag.

Ranking basisAnswersUse it when
Contribution per unitWhich single sale adds the most cashNothing is constrained — you can make and sell everything you can quote
Contribution margin ratioHow much of each revenue dollar survivesRevenue capacity is the limit: quoting time, sales headcount, discount policy, break-even work
Contribution per constraint unitWhich line earns most from the bottleneckA machine, a press, a licensed technician, a kiln or floor space caps output
Same three products, three different "best" answers. The constraint decides which one is right.

What counts as a variable cost

  • Materials and bought-in components, at the price you actually pay now, not last year's standard.
  • Freight out, duty and packaging — often forgotten, and on low-price items they can be a third of the contribution.
  • Sales commission, rebates and card fees, because they scale with the invoice. Run them through the sales commission calculator if the rate is tiered.
  • Direct labour only if it genuinely flexes. Salaried operators on a fixed shift are a fixed cost, whatever the routing says.
  • Not depreciation, supervision, rent, IT, insurance or any allocation. If the number changes when volume does not, it is fixed.

Discounts land on contribution, not on price. A 10% discount on a 35% contribution ratio removes 29% of the contribution, because the variable cost does not move. On the compact pump at 26.5%, the same 10% off removes 38% of it. That asymmetry is why blanket discount authority is expensive; the discount cascade calculator shows what a stack of them leaves behind, and the break-even analysis guide covers what happens to the break-even point when contribution falls.

Getting contribution by line out of your ERP

The arithmetic is trivial. Assembling it is not: net price after rebates, a variable cost that excludes absorption, units by line for a consistent period, and a constraint rate per unit that lives in the routing rather than the item master. answers it as a question — "contribution margin by product line last quarter, excluding allocated overhead" — computed against your own account, with the query printed underneath so you can check which costs it included rather than take the number on faith.

Frequently asked questions

What is contribution margin?

Contribution margin is selling price minus variable cost. It is what a sale contributes toward fixed costs and profit. At a $480 price and $312 of variable cost, contribution is $168 per unit or 35% of price. Fixed and allocated costs are excluded on purpose, because they do not change when you sell one more unit.

How do you calculate contribution margin per unit?

Subtract every cost that varies with the unit from the net selling price: materials, packaging, outbound freight, commission and card fees, plus direct labour if it genuinely flexes. Do not subtract rent, supervision or depreciation. Multiply the result by units sold to get total contribution for the line.

What is the difference between contribution margin and gross margin?

Gross margin subtracts cost of goods sold, which normally includes absorbed fixed overhead. Contribution margin subtracts only variable costs. Gross margin is the reported figure; contribution margin is the decision figure. Contribution margin is always the higher of the two when overhead is absorbed into standard cost.

Is a 40% contribution margin good?

It depends entirely on your fixed cost base. A 40% ratio is comfortable for a distributor with light fixed costs and thin for a plant carrying heavy depreciation. The useful test is contribution against fixed costs: total contribution must clear fixed costs before any of it is profit.

Which product should I push?

The one with the highest contribution per unit of whatever is scarce. If capacity is free, rank by contribution per unit. If revenue capacity is the limit, rank by contribution ratio. If a machine or a skilled operator caps output, rank by contribution per hour of that resource — that ordering often differs from the other two.

Should fixed overhead be included in variable cost?

No. Including it defeats the purpose of the measure and makes incremental orders look unprofitable when they are not. Keep fixed overhead below the contribution line and compare total contribution against it. If your item cost field already carries absorption, rebuild the variable cost from the bill of materials.

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