David is a Chartered Financial Analyst with over 15 years of experience in corporate finance and managerial accounting, specializing in CVP and profitability analysis.
This 4-in-1 Contribution Margin calculator helps you find the missing variable in your profit analysis. Enter any three values—Total Contribution Margin, Price per Unit, Variable Cost, or Quantity—and we will solve for the fourth.
Contribution Margin Calculator
Contribution Margin Formula
T = Q * (P – V)
Solve for Quantity (Q):
Q = T / (P – V)
Solve for Price (P):
P = (T / Q) + V
Solve for Variable Cost (V):
V = P – (T / Q)
Formula Variables
- (T) Total Contribution Margin: The total amount of revenue remaining after subtracting total variable costs. This is the money available to cover fixed costs.
- (P) Price per Unit: The selling price for one unit of your product.
- (V) Variable Cost per Unit: The costs directly tied to producing one unit (e.g., materials, direct labor).
- (Q) Quantity: The total number of units sold.
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What is Contribution Margin?
Contribution Margin is a foundational concept in managerial accounting that reveals how much profit is earned from selling one unit of a product *before* fixed costs are considered. The simple formula for the *unit* contribution margin is:
Unit Contribution Margin = Price per Unit (P) – Variable Cost per Unit (V)
For example, if you sell a t-shirt for $20 (P) and it costs $8 in materials and labor (V) to make, your unit contribution margin is $12. This $12 is the amount that “contributes” to paying off your fixed costs (like rent, salaries, etc.) and then, once those are paid, becomes pure profit.
The **Total Contribution Margin (T)**, which this calculator uses, is simply the unit contribution margin multiplied by the number of units sold (Q). It represents the total pool of money available to cover fixed costs and generate profit for the business. It is a critical metric for setting prices and understanding profitability.
How to Calculate Contribution Margin (Example)
-
Identify the Variables
A company sells custom mugs. The details are:
• Price per Mug (P): $15.00
• Variable Cost per Mug (V): $5.00 (blank mug, printing)
• Quantity Sold (Q): 2,000 units
We need to find the Total Contribution Margin (T). -
Choose the Correct Formula
To find the Total Contribution Margin, we use the formula:
T = Q * (P – V) -
Calculate Unit Contribution Margin
First, find the contribution margin for a single unit:
P – V = $15.00 – $5.00 = $10.00 per mug -
Calculate the Total Contribution Margin
Now, multiply the unit contribution margin by the quantity sold:
T = 2,000 * $10.00
T = $20,000
The company has $20,000 available to pay its fixed costs (rent, etc.). If its fixed costs are less than $20,000, it has made a profit.
Frequently Asked Questions (FAQ)
What is the difference between Contribution Margin and Gross Margin?
Contribution Margin subtracts *only* Variable Costs from Revenue. Gross Margin subtracts *all* Cost of Goods Sold (COGS), which can include some fixed costs (like factory overhead). Contribution Margin is often considered more useful for managerial decisions.
What is the Contribution Margin Ratio?
The Contribution Margin Ratio (CMR) is the contribution margin expressed as a percentage of the price. The formula is `(P – V) / P`. In our example, it would be ($15 – $5) / $15 = 66.7%. This means that for every dollar of sales, 66.7 cents is available to cover fixed costs and profit.
How does Contribution Margin relate to the Break-Even Point?
They are directly related. The Break-Even Point in units is calculated by dividing your total Fixed Costs by your unit Contribution Margin. For example, if your fixed costs are $10,000 and your unit contribution margin is $10 (from our example), your break-even point is 1,000 units ($10,000 / $10).
Why can’t my Price be lower than my Variable Cost?
If your Price (P) is less than your Variable Cost (V), you lose money on every single unit you sell. This creates a negative contribution margin, and you will *never* be able to cover your fixed costs. You will only lose more money with each sale.