The formula for calculating your contribution margin is Total Revenue – Variable Costs. This allows you to calculate exact profit per unit sold.
Calculating your contribution margin is important when pricing your product. The contribution margin allows you to know how much you will make per unit sold, and allows you to know how low you can price your product for a sale or price reduction.
The formula for calculating your contribution margin percentage is: (Total Revenue – Variable Costs) / Total Revenue. This figure allows a business to know what percentage of their money is available to paying off their fixed costs, such as rent and payroll. Then the leftovers is what the company can deem as profit. Check out our business terms on operating cost and overhead to learn more.