Contribution margin – meaning

Contribution margin – meaning

The contribution is the difference between the selling price and variable cost (or marginal cost) is known as `contribution’ or `gross margin’. It may be considered as some sort of fund from out of which all fixed costs are met. The difference between contribution and fixed cost represents either profit or loss, as the case may be.

The contribution is calculated using the following formula:

Contribution = Selling Price – Variable Cost= Fixed Cost + Profit Or – Loss

It is clear from the above equation that profit arises only when contribution exceeds fixed costs. In other terms, the point of ‘no profit no loss’ will be at a level where the contribution is equal to fixed costs.

2 Comments

  1. […] volume ratio or P/V ratio is the ratio or percentage of contribution margin to sales. This ratio is also known as marginal income ratio, contribution to sales ratio or […]

  2. […] the break-even point. In this method, the fixed cost line is drawn parallel to the X-axis. The contribution line is then drawn from the origin which goes up with the increase in output. The sales line is […]

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