What is contribution margin?
Contribution margin: Price minus the variable costs of one item. It shows how much each sale adds towards fixed costs and then profit.
Margin per item = price - variable costs of one item
Example
Nora sells a cinnamon bun for $4.00. Ingredients cost $1.20, the paper bag $0.15 and the card fee $0.15. Each bun adds $4.00 - $1.50 = $2.50 towards her fixed costs and then profit.
Made-up people and numbers from the cases of our course; the math is real.
A common mistake
Subtracting only the ingredients: $4.00 - $1.20 = $2.80. The bag and the card fee also come with every bun sold.
Try it with your own numbers: Break-even calculator (free, no sign-up).
Practise this in block 1
Block 1 of Ownwise is free, with no account needed to start: short lessons on costs, margin and break-even, then a made-up case where you make the decisions.