A company’s contribution margin measures its sales revenue after accounting for variable costs.
The formula to calculate the contribution margin is the following:
Contribution Margin = Net Sales – Variable Costs
Net Sales = Gross Sales – Returns, Allowances & Discounts
A company’s variable costs are direct and indirect expenses incurred in producing and selling goods and services. The types of variable costs will vary between businesses and sectors.
A manufacturing company may have the following variable costs:
- Direct Materials
- Production Supplies
- Freight Costs
- Direct Labor
- Variable Utilities
A manufacturing company may have the following fixed costs:
- Insurance
- General and Administrative Expenses
- Rents
- Interest Expense
- Depreciation Expense
Example Contribution Margin Calculation
Company ABC Inc. (the “Company”) is a large publicly traded corporation looking to calculate its contribution margin for the first month of the fiscal year, January 1, 2024, to January 31, 2024.
The company’s financial figures for January 2024 are the following:
- Total Sales Revenue: $800,000
- Sales Returns: $15,000
- Total Variable Costs: $450,000
Net Sales = 800,000 – 15,000
Contribution Margin = 785,000 – 450,000
The company’s contribution margin is $335,000 for the month of January 2024.