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Contribution Margen or Gross Profit

The most important figure in the profit and loss statement is Contribution Margen, also called 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).


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

Sales price (Turnover):

25.00 $.

- Purchase price at CD company:

18.75 $

- Packaging and padded envelope:

01.00 $.

- Postage:

02.00 $.

= Gross Profit:

03.25 $ (13 %)

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 %
- Calculate your contribution ratio

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.

If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.
- Jeff Bezos, Amazon.com founder

Gross Profit - how to act on it
SWOT Analysis + PO
Contribution Ratio vs Markup
Credit Sale
Contribution Margen or Gross Profit
Influence on Profits
Fixed Costs / Overhead Expenses
Terms of Sales and Delivery
Reduce Stock
Keep Control
The Art of Consultancy
What is Accountancy?
Principles in Accounting
Understand Financial Info
Safeguarding Your Assets
Help to Take Action
Close your Business