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Contribution Margin - Example

Related answers:

This page explains:
  1. How to calculate contribution margin
  2. How to calculate contribution ratio

Contribution margin - also called gross profit - is the sales price received minus the variable cost.

Example of contribution margin
If you sell CDs at $25 on the internet and promote it as “No postage & packaging”, your calculation could look like this:

Sales price

25.00 $.

- Purchase price at CD company:

18.75 $

- Packaging and padded envelope:

01.00 $.

- Postage:

02.00 $.

= Contribution margin:

03.25 $ (13 %)

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

This amount is also called the contribution margin or gross profit.

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

  • Contribution margin x 100 / sales price

In the above CD example the contribution ratio is:

  • 3.25 $ x 100 / 25 $. = 13 %

Contribution margin when selling service
The contribution margin differs substantially between different trades. The above example generates a relatively modest contribution margin.

Compare this to a consultant giving a management and development presentation which may pay you $1500 per presentation. Here you may only have $50 of direct expenses for the cab taking you to the hotel where the presentation is held. This generates a $1450 contribution margin (97%).

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

The same thing applies to, for example, accountants, lawyers, psychologists and others.

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- Click and share your experience on:
Contribution Margin - Example

Jane Banda, U.S. 01-03-2013
I am just so happy that I understand what he says. I always thought budgets and figures were difficult to grasp. Is this really all?

Eckford Jere, Zimbabwe 25-06-2012
23 years

Asim Ayaz, Pakistan 09-03-2012
Very nice ,easy to learn and Understand the Concept...THANX

Barbara Bowen, US 12-02-2012
Very easy explanation!

dr Agrawal, India 12-08-2011
Very simple, easy to follow

Manvendra Raturi, India 31-03-2011
It´s a simplest way to explain..... fantastic.....

Marie, Australia 04-03-2011
Fantastic explanation Thx

Swaroopa, UAE 08-02-2011
Very good information, couldn´t find a simpler explanation anywhere else...Thanks

Nerissa, Copenhagen 28-01-2011
The explanation is very simple and easy to understand than other sites I´ve visited. Very helpful. Thanks for sharing your knowledge and i hope you´ll continue doing so.

Ani, India 26-01-2011
simple and useful explanation.Thanks

Genius, USA 04-01-2011
Thank you, now I fully understand margarine. I think a good contribution of margarine is 1/5 per slice of toast.

NOEL , SA 15-11-2010

Eric, Baloyi, SA 26-11-2009
Never underestimate the information of contribution margin. It is the most important key figure in the budget/financial statement.


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