Contribution Margin
What is a Contribution Margin?
Contribution margin shows how much money variable costs are contributing to fixed costs and profit.
![cm1](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm1.jpg)
How it Works
A business produces revenue.
![cm2](https://seeaccountingnow.online/wp-content/uploads/2021/06/cm2.jpg)
To produce that revenue, the business will incur costs.
![cm3](https://seeaccountingnow.online/wp-content/uploads/2021/06/cm3.jpg)
These costs are made up of two parts.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm4.jpg)
One part comprises fixed costs.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm5.jpg)
Fixed costs include things such as rent, admin salaries, insurance.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm6.jpg)
These costs need to be paid regardless of whether the business earns income or not.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm7.jpg)
Furthermore, they always remain at the same level no matter what happens to sales.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm8.jpg)
The other costs are variable costs.
![cm9](https://seeaccountingnow.online/wp-content/uploads/2021/06/cm9.jpg)
Variable costs include things such as sales commissions, direct labor costs, and cost of materials used in production.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm10.jpg)
They are called variable costs because they vary dependent on revenue levels.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm11.jpg)
They are what drives revenue higher.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm12.jpg)
As a result, they drive profit higher, as well.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm13.jpg)
Variable costs are like a crane.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm14.jpg)
They lift revenue.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm15.jpg)
In the process—they also lift profit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm16.jpg)
To calculate contribution margin, you deduct total variable costs from total revenue.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm17.jpg)
The difference shows how much variable costs are contributing to the business.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm18.jpg)
It will show you how much money variable costs are contributing to fixed costs.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm19.jpg)
And it will also show you how much they are contributing to profit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/cm20.jpg)
© R.J. Hickman 2020