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Contribution Margin - Example

Learn how to calculate contribution margin

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.

Read how you can act on a low Gross Profit - another name for contribution margin.

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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