Calculate contribution margin per unit and contribution margin ratio to analyze profitability, make pricing decisions, and determine break-even points. Essential for cost-volume-profit (CVP) analysis and understanding unit economics.
Contribution Margin:
CM = Selling Price - Variable Costs
CM Ratio:
CM Ratio = CM ÷ Selling Price × 100%
Measures profitability per unit sold
Break-even Units:
BE Units = Fixed Costs ÷ CM per unit
Break-even Revenue:
BE Revenue = Fixed Costs ÷ CM Ratio
Point where total revenue equals total costs
Costs that change with production volume
Costs that remain constant regardless of volume
Analyzing profitability per cup of coffee:
Custom t-shirt printing analysis:
Software subscription economics:
High CM ratio = High operating leverage
Buffer between actual and break-even sales
Impact of product mix on overall CM
| Industry | Typical CM Ratio | Characteristics |
|---|---|---|
| Software/SaaS | 70-90% | Low variable costs, high fixed costs |
| Professional Services | 60-80% | Labor is main variable cost |
| Manufacturing | 25-45% | High material and labor costs |
| Retail | 20-40% | COGS is major component |
| Restaurants | 60-70% | Food cost typically 30-35% |
| Airlines | 40-55% | Fuel and labor intensive |
Select single product or break-even analysis
Price per unit sold to customers
All costs that vary with production
For break-even and profit analysis
Units sold or expected to sell
Get CM, break-even, and profitability
Always separate fixed and variable costs accurately for reliable CM analysis
Use CM ratio to quickly evaluate pricing changes and their profit impact
Monitor CM trends over time to identify efficiency improvements or issues
Consider activity-based costing for more accurate variable cost allocation
Remember that some costs are semi-variable and need careful classification