Contribution margin

Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. Thus it is the amount available to cover fixed expenses and then to provide profits for the period. Contribution margin is first used to cover the fixed expenses and then whatever remains go towards profits. If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period. This concept is explained in the following equations:




Sales revenue − Variable cost* = Contribution Margin



*Both Manufacturing and Non Manufacturing



Contribution margin − Fixed cost* = Net operating Income or Loss



*Both Manufacturing and Non Manufacturing