# Contribution margin / contribution margin calculation

Also known as: Coverage margin

In a business cost calculation, the difference between variable costs and economic revenues is called the contribution margin. This is a partial cost calculation in which only the variable costs and not the total costs on the Payers will be charged.

## Definition / explanation

The contribution margin calculation is primarily used to analyze when a product pays for itself in terms of cover costs. In addition, the so-called break-even point can be determined in this way. This means the sales volume from which the manufacturer makes a profit with the product. When calculating the contribution margins, the following factors in particular play a decisive role:

• Unit contribution margin
• Total contribution margin
• Relative contribution margin

## Unit contribution margin and total contribution margin

In order to calculate the unit contribution margin for a unit, the variable costs must be deducted from the sales revenue for a unit. If the value determined in this way is below zero, it is a negative contribution margin.

The company does not suffer any losses. If the value is equal to zero, the costs incurred by the production per piece are covered. Only when the result is above zero does the manufacturing company make a profit due to the positive contribution margin. Most of the time, a negative contribution margin means that the piece in question is taken out of production. However, some companies still keep the item with the negative coverage figures in order to be able to offer the full range.

As a rule, the negative contribution margin is then borne by the positive contribution amounts of the other products. In this case, the total contribution margin is important. This is calculated by multiplying the unit contribution margin by the sales quantity produced.

## Relative contribution margin

Sometimes there is a bottleneck in a manufacturing process, for example because only limited machine capacity is available. In order to determine the relationship between the unit contribution margin and the operational bottleneck, the so-called relative contribution margin is first calculated.

This makes it possible to determine the optimal production process that only meets the limited technical capacity. The relative contribution margin is calculated mathematically by dividing the unit contribution margin by that of the bottleneck (e.g. the production time).

## Simple and multi-level contribution margin calculation

Contribution margins are determined either by means of a simple or multi-level contribution margin calculation.

Simple contribution margin calculation - With the simple contribution margin calculation, all variable costs are first subtracted from the sales revenue. The fixed costs are then also deducted from the contribution margin calculated beforehand. If the contribution margin is greater than the amount that was deducted due to the fixed costs, the company has made a profit.

Multi-level contribution margin calculation - Another possibility of cost-performance accounting is the multi-level contribution margin calculation, in which the fixed costs are divided into three areas before they are deducted from the revenue:

1. Fixed product costs - Fixed costs that can be directly assigned to a specific product
2. Product group fixed costs - costs that belong to a specific group of products
3. Company Fixed Costs - Remaining operational fixed costs

The main advantage of the multi-level invoice variant is that the company can carry out a much more detailed cost-benefit calculation.

## Summary

• Contribution margin is the difference between the revenues generated (sales) and the variable costs
• Contribution margins show when the production costs are covered and a profit can be expected
• Thanks to the multi-level contribution margin calculation, the costs are broken down in detail
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