Contribution margin
Contribution shows how much a product adds towards fixed costs. It is the basis of marginal costing and many short-term decisions.
Formulas
- Unit contribution = price − variable cost per unit
- Total contribution = unit contribution × quantity
- Operating result = total contribution − fixed costs
- Several products: add the contributions, then deduct fixed costs once.
Your turn
Three problems on this topic. Amounts with or without thousands separators, a point for pence.
Task
A firm makes three products. Total fixed costs are £95,000.00. Work out the total contribution and the operating result.
| Product | Price | Variable cost/unit | Quantity |
|---|---|---|---|
| A | £42.00 | £15.00 | 800 |
| B | £20.00 | £9.00 | 2,300 |
| C | £76.00 | £56.00 | 3,800 |
Total contribution in £
Operating result in £ (loss with a minus)
Which product contributes most to covering fixed costs?
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Worked example
A company sells 250 units a year at £43.00 each. Variable costs are £23.50 per unit and fixed costs £7,000.00 a year. Work out the unit contribution, the total contribution and the operating result.
Worked solution
- 1.Unit contribution = price − variable cost = £43.00 − £23.50 = £19.50
- 2.Total contribution = £19.50 × 250 = £4,875.00
- 3.Operating result = contribution − fixed costs = £4,875.00 − £7,000.00 = -£2,125.00
Typical mistake: Spreading fixed costs per unit and taking them off the unit contribution. Contribution only deducts variable costs; fixed costs come off at the end.
A firm makes three products. Total fixed costs are £230,000.00. Work out the total contribution and the operating result.
| Product | Price | Variable cost/unit | Quantity |
|---|---|---|---|
| A | £63.50 | £45.50 | 2,500 |
| B | £85.50 | £41.50 | 2,200 |
| C | £146.00 | £106.50 | 2,200 |
Worked solution
- 1.A: (£63.50 − £45.50) × 2,500 = £45,000.00
- 2.B: (£85.50 − £41.50) × 2,200 = £96,800.00
- 3.C: (£146.00 − £106.50) × 2,200 = £86,900.00
- 4.Total contribution = £228,700.00; operating result = £228,700.00 − £230,000.00 = -£1,300.00
- 5.B contributes most (highest total contribution, not necessarily the highest per unit).
Typical mistake: Judging the contribution by the unit margin alone; what counts is margin times quantity.
Frequently asked questions
What does a positive contribution mean?
Each unit covers its variable costs and adds something towards fixed costs. Whether there is a profit depends on total contribution exceeding fixed costs.