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What is Contribution margin?

Sales minus variable costs: the amount that covers fixed costs and produces profit. Its ratio to sales is the contribution margin ratio, equal to 1 − variable cost ratio.

Japanese name: 限界利益

Contribution margin appears in 6 practice questions across 1 topic, including Business Strategy and Accounting Basics.

Field: Business Strategy and Accounting Basics

Try it: questions about Contribution margin

A company has sales of ¥50 million, variable costs of ¥20 million and fixed costs of ¥24 million. Which is its break-even sales?

  1. A¥40 million
  2. B¥44 million
  3. C¥60 million
Show answer and explanation

Answer: A. ¥40 million

The variable cost ratio is 20 ÷ 50 = 0.4, so the contribution margin ratio, the part of sales available to cover fixed costs, is 1 − 0.4 = 0.6. Break-even sales are the sales at which the contribution margin exactly covers the fixed costs, so 24 ÷ 0.6 = ¥40 million. The current sales of ¥50 million are above the break-even point, and the profit is 50 − 20 − 24 = ¥6 million.

Which is the margin of safety ratio of a company with sales of ¥200 million, a variable cost ratio of 70% and fixed costs of ¥45 million?

  1. A25%
  2. Babout 33%
  3. C75%
Show answer and explanation

Answer: A. 25%

The contribution margin ratio is 1 − 0.7 = 0.3, so break-even sales are 45 ÷ 0.3 = ¥150 million. The margin of safety ratio expresses how far current sales exceed the break-even point as a share of sales: (200 − 150) ÷ 200 = 25%. It means the company does not fall into a loss until sales drop by 25%, and the larger it is, the more resistant the company is to falling sales. Break-even sales ÷ sales = 75% is the break-even ratio, and the two add up to 100%.

Contribution margin in the explanations

Questions that mention Contribution margin (6)

  1. A company has sales of ¥50 million, variable costs of ¥20 million and fixed costs of ¥24 million. Which is its break-even sales?
  2. Which is the margin of safety ratio of a company with sales of ¥200 million, a variable cost ratio of 70% and fixed costs of ¥45 million?
  3. In a business with fixed costs of ¥30 million and a variable cost ratio of 60%, which is the sales needed to make a profit of ¥10 million?
  4. A semiconductor manufacturer is developing a dedicated chip. The selling price per chip is ¥4,000, the variable cost per chip (wafer, package, test and so on) is ¥2,400, and the fixed costs such as mask making and design are ¥800 million. Which is the break-even sales volume?
  5. A business has fixed costs of ¥27 million and a variable cost ratio of 40%, and has no costs other than variable and fixed costs. Which is the sales needed to achieve an operating profit margin (operating profit ÷ sales) of 15%?
  6. There are two ways to make a product: plan A (fixed costs ¥10 million, variable cost ratio 60%) and plan B, which automates the production line (fixed costs ¥16 million, variable cost ratio 45%). Above a certain level of sales, plan B earns more profit than plan A. Which is that level?

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Break-Even Point CalculatorCalculate the break-even sales, variable cost ratio, marginal profit ratio, margin of safety and the sales needed for a target profit from sales, variable costs and fixed costs, with a chart

Related terms

Variable cost Fixed cost Break-even point ABC analysis Depreciation Five forces analysis Income statement (P/L) Net present value (NPV) Patent Product life cycle

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