Contribution Margen or Gross Profit

The difference between Turnover and Variable Cost shows how much money you have got left to pay your rent, telephone, internet access, marketing and your own salary (profit of the firm).

Example
If you sell CDs at $ 25.- on the internet and promote it like this: "No postage and packaging", your calculation could look like this:

This calculation shows you that each time you sell a CD at 25 $. you have 3.25 $ left. This has to cover other expenses than those related directly to purchasing, packing and dispatching the CD.

Contribution Ratio
You can also calculate a percentage, then it is called contribution ratio. It is done like this:

• Gross Profit x 100 / sales price = Contribution Ratio

In the above CD example the contribution ratio is:

• 3.25 $ x 100 / 25 $. = 13 %

Gross profit when selling services
The Gross Profit differs substantially between different trades. The above example generates a relatively modest contribution margin.

Compare this to a consultant giving management and development presentations which may cost 1.500 $ per presentation. Here you may only have 50 $ of direct expenses for the Taxi taking you to the hotel where the presentation is held. This generates a 1450 $ Gross Profit (97 % in contribution ratio).

But then you probably have considerable fixed costs and you cannot expect to sell presentations 40 hours a week.

The same thing applies to accountants, lawyers, psychologists and others.
- Go to next business issue: Acting om Gross Profit
- Business Plan - overview on how to start a business
- Basic Accountancy - understand the money flow in your business

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