Contribution margin
In short. Contribution margin is what each sale leaves over after the variable costs of making that sale, the amount it contributes towards fixed costs and then profit. As a ratio, it is the contribution divided by the price, so a 60 percent margin means 60p of every pound sold is left to cover fixed costs.
Last checked against its sources on 10 October 2026. How we write these.
Contribution per sale is the price minus the variable costs that rise with each sale: materials, delivery, payment fees, commission. It ignores fixed costs such as rent and software, because those are paid whatever you sell.
That makes it the key number for break-even. Divide your monthly fixed costs by the contribution per sale and you have the number of sales a month needed to cover them.
A cake box that sells for 30 and costs 12 to make and deliver contributes 18, a contribution margin of 60 percent. If fixed costs are 900 a month, the business needs 50 boxes a month to break even.
It is also a useful check on discounts. Cutting the price by a fifth does not cut profit by a fifth: it comes straight off the contribution, so the number of sales needed to break even can rise sharply.
Questions people ask
What is the difference between contribution margin and gross margin?
Gross margin subtracts the cost of goods sold, which can include some fixed production costs. Contribution margin subtracts only the costs that vary with each sale, which makes it the better number for break-even.
How do I calculate contribution margin?
Subtract the variable cost of one sale from its price. For the ratio, divide that contribution by the price.
Sources
- Contribution Margin Ratio (Corporate Finance Institute) checked 10 October 2026