what is contribution margin the number that reveals if youll ever profit

Contribution margin is revenue remaining after variable costs. It contributes toward fixed costs and then profit.

Formulas

Contribution margin = revenue − variable costs. Contribution margin ratio = contribution margin / revenue × 100. Break-even revenue = fixed costs / contribution margin ratio.

Example

A product selling for $100 with$60 variable cost contributes $40, a 40$20,000 fixed costs, break-even revenue is $50,000 under the same mix and pricing.

Limitations

Classifying costs as fixed or variable requires judgment. Mixed costs, capacity steps, discounts, returns, and changing product mix can alter the result.