Contribution Margin & Ratio

Contribution margin

Contribution margin is a measure of how much the sales of a particular product contributes to cover the company’s fixed costs.

The sale of a product is associated with some directly (or variable) costs, including purchase price, freight, processing, packaging and so on. Once these costs are deducted from the selling price, you have the contribution margin.

Example:

I sell a bottle of apple juice for EUR 4.

The apples that have been used in the production cost EUR 0,3 in purchase price. Processing costs EUR 0,9 in salary. The bottle costs EUR 0,3 in purchase price. Shipping for the purchased goods costs EUR 0,4.

The direct (or variable) costs are a total of EUR 1,9.

Contribution margin = EUR 4 - EUR 1,9 = EUR 2,1.

The contribution margin from the bottle of apple juice is EUR 2.1 which helps to cover the company’s fixed costs.

Contribution ratio

Contribution margin can be converted into contribution ratio that reflects the contribution margin percentage of the sale price.

Contribution ratio = (contribution margin / sales price) * 100

With the example above, the contribution ratio when selling a bottle of apple juice is

Coverage ratio = (2.1 / 4) * 100 = 52.5%

tracezilla continuously calculates your expected contribution margin, so that you always have an overview of the finances in the sale of your products. Learn how tracezilla ensures good cost management in your food business