Contribution Margin

Contribution margin is the amount remaining from sales revenue after subtracting variable costs, contributing to covering a business’s fixed costs and generating profit.

Formula:

Contribution Margin = (Sales Revenue – Variable Costs) / Sales Revenue

Importance:

  • Indicates profitability per unit sold.

  • Assists in pricing and cost management.

  • Helps calculate break-even points.

Example:

If a company sells a product for AED 500 with AED 300 in variable costs, the contribution margin is 40%.