Contribution margin per unit and ratio
Calculate the contribution margin per unit and as a ratio, and use it to see how sales cover fixed costs.
Not every euro of revenue is available to pay your rent. Part of it is already used up by the materials in the product. The contribution margin shows what is left over.
What you will learn
- What the contribution margin is, per unit and in total
- How to calculate the contribution margin ratio
- How total contribution margin covers fixed costs and creates profit
- How to read the result for simple decisions
Explanation
The contribution margin per unit (sometimes shortened to CM; German: Deckungsbeitrag) is the selling price minus the variable cost per unit. It is the amount each unit "contributes" towards fixed costs and then profit.
Contribution margin per unit = Price − Variable cost per unit
The contribution margin ratio is the contribution margin as a share of the price. It tells you how many cents of each euro of revenue are left after variable costs.
Contribution margin ratio = Contribution margin per unit ÷ Price
The total contribution margin is the contribution margin per unit × units sold. Once you subtract fixed costs from it, you get profit:
Profit = Total contribution margin − Fixed costs
Worked example
Nordlicht Candles (fictional), using the costs from the previous lesson.
Assumptions: price €16 per candle; variable cost €5.70 per candle; fixed costs €546 per month; 150 candles sold in the month. All amounts exclude VAT; payment fees, income tax and the owner's own pay are not included.
Step 1 – Contribution margin per unit
€16.00 − €5.70 = €10.30 per candle
Step 2 – Contribution margin ratio
€10.30 ÷ €16.00 = 0.64375 → about 64.4%
About 64 cents of every euro of revenue are available to cover fixed costs and profit.
Step 3 – Total contribution margin for 150 candles
150 × €10.30 = €1,545
Step 4 – Profit
€1,545 − €546 = €999
Check using revenue: revenue = 150 × €16 = €2,400. Variable costs = 150 × €5.70 = €855. Profit = €2,400 − €855 − €546 = €999. Both methods give the same result.
| Item | Per candle | 150 candles |
|---|---|---|
| Revenue | €16.00 | €2,400 |
| Variable costs | €5.70 | €855 |
| Contribution margin | €10.30 | €1,545 |
| Fixed costs | – | €546 |
| Profit | – | €999 |
Limitations: the €999 is before income tax and before paying the owner for their time. It is not "income" the owner can simply keep.
Common mistake
Practice activity
Calculate on paper for Rheinblick Coffee Cart (fictional):
- Price per cup: €3.50; variable cost per cup: €0.85 (from the previous lesson)
- Fixed costs: €850 per month; cups sold: 1,400 per month
- All amounts exclude VAT; ignore taxes and fees.
- Contribution margin per cup
- Contribution margin ratio (round to one decimal place)
- Total contribution margin for the month
- Profit for the month
Show solution
- €3.50 − €0.85 = €2.65 per cup
- €2.65 ÷ €3.50 = 0.7571… → 75.7%
- 1,400 × €2.65 = €3,710
- €3,710 − €850 = €2,860
Limitations: one average price and one average variable cost hide differences between drinks. A real menu would need a contribution margin for each product.
Key takeaways
- Contribution margin per unit = price − variable cost per unit.
- Contribution margin ratio = contribution margin per unit ÷ price.
- Profit = total contribution margin − fixed costs.
- A product with a negative contribution margin loses more money with every sale.
Next step
In the next lesson, you will use the contribution margin to calculate your break-even point.
Self-check
Answer the questions, then check your answers. You can retry as often as you like.
Automatic self-check for your own revision. Your answers are checked in your browser and are not seen or assessed by us. It is not an exam and not a qualification.
Your progress
“Complete” only means you marked the lesson as done. It is not a test of your understanding. Progress and notes are saved only in this browser on this device — not in an account.