Contribution Margin
What each sale leaves over to pay the fixed bills and make a profit.
In your head, jot if needed · no calculator why?
Opens at level 14.
Lesson and untimed practice
Read the full lesson and try each skill without a clock. About 3 minutes to read.
skills · practice stats
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Contribution per sale not tried yet
worked example
A product sells for $980. Variable costs are $332 of materials and $211 of packaging per unit. Rent is $3,000 a month. What does each unit contribute toward fixed costs and profit?
Answer: $437.00
- Contribution = price − all variable costs = $980 − ($332 + $211) = $980 − $543 = $437.
- Rent is fixed, so it isn't subtracted per unit.
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Contribution margin ratio not tried yet
worked example
A lawn-care plan sells for $170 and uses $68 of variable costs. What is its contribution margin ratio, as a percentage?
Answer: 60%
- Ratio = contribution ÷ price = ($170 − $68) ÷ $170 = $102 ÷ $170 = 60%.
- Each sales dollar leaves 60 cents for fixed costs and profit.
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Operating profit from contribution not tried yet
worked example
153 customers each pay $800 a month and each costs $460 in variable costs. Fixed costs are $4,000 a month. What is monthly operating profit?
Answer: $48,020.00
- Total contribution = 153 × ($800 − $460) = 153 × $340 = $52,020; minus fixed $4,000 = $48,020.
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Contribution, gross profit, or net income? not tried yet
worked example
A $1,650 contract has $540 of costs that rise and fall with each customer. What is the $1,110 difference called?
- Contribution
- Net cash flow
- Net income
- Gross profit
Answer: Contribution
- Price minus the costs that move with each unit is contribution: $1,650 − $540 = $1,110.
- Gross profit subtracts cost of goods sold instead, which can include some fixed costs, so the two can differ.
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