Enter price, variable cost and fixed costs to get contribution per unit, contribution ratio, break-even units and operating profit.
Contribution margin per unit is what each sale leaves over after the costs that only exist because that sale happened. Three steps, using the default figures in the calculator above.
1. Start with the selling price. $60 per unit.
2. Subtract every variable cost per unit. Not only the cost of the product, but shipping, payment processing, packaging and any advertising cost that scales with each order. In the example these add up to $27.
3. What is left is the contribution margin per unit. $60 minus $27 is $33. Each unit sold contributes $33 toward fixed costs, and once fixed costs are covered, $33 of profit.
From there, break-even follows in one line. Fixed costs of $18,000 divided by $33 is 545.5, so the business needs 546 units to cover the fixed base. At 900 units a period, contribution is $29,700 and operating profit is $11,700.
The step people skip is the second one. Using only the product cost as the variable cost produces a contribution margin that looks larger than it is, and every figure built on it, break-even units included, will be too optimistic.
The contribution margin ratio is the same figure expressed as a share of price rather than in dollars. It answers a slightly different question: of every dollar of revenue, how much is available to pay fixed costs.
In the example, $33 divided by $60 is 55 percent. Every dollar of revenue contributes 55 cents toward fixed costs.
| Price | Variable cost | Per unit | Ratio | Break-even revenue on $18,000 fixed |
|---|---|---|---|---|
| $60 | $27 | $33 | 55.0% | $32,727 |
| $60 | $36 | $24 | 40.0% | $45,000 |
| $60 | $45 | $15 | 25.0% | $72,000 |
| $80 | $36 | $44 | 55.0% | $32,727 |
The ratio is the version to use when products have different prices, because it lets you compare a $20 item against a $200 one on equal terms. It is also the number that sets an advertising ceiling: a 55 percent contribution ratio means ad spend above 55 cents per dollar of revenue loses money before a single fixed cost is paid, which is the same arithmetic the break-even ROAS calculator runs.
Gross margin subtracts the cost of goods from the price. Contribution margin subtracts every cost that moves with the unit, goods, but also shipping, payment processing, packaging, returns provision and, if you want the number that matters for growth, the acquisition cost of the order.
| Contribution per unit | Units to cover $18,000 |
|---|---|
| $10 | 1,800 |
| $20 | 900 |
| $33 | 546 |
| $45 | 400 |
| $60 | 300 |
Three ways to move break-even: raise price, cut variable cost, cut fixed cost. Most teams reach for the third, which is slow and painful. The first is usually the strongest and the least attempted.
Allocating fixed costs into the unit and then deciding a product is unprofitable.
Allocating fixed costs into the unit and then deciding a product is unprofitable. Spread $18,000 of overhead across 900 units and each one looks like it carries $20 of burden; a product contributing $15 then appears to lose $5 and gets cut. But the overhead does not leave with it. Drop the product and you have lost $13,500 of contribution and kept every dollar of fixed cost.
Fixed costs are a total to be covered, not a tax per unit. Any product with positive contribution margin is helping, even a small one, the only question is whether the shelf space, attention or inventory it occupies could contribute more if used for something else.
Contribution margin per unit divided by selling price. A $60 product with $27 of variable cost has a contribution margin of $33 and a ratio of 55 percent, meaning each dollar of revenue contributes 55 cents toward fixed costs.
We use Google Analytics to count visits, only if you allow it. Nothing you type into a calculator is ever sent. Privacy policy