The amount by which revenues of an entity exceed variable costs (including those relating to production, selling, and administration). This margin can be calculated for a product, department, or the entire entity. Generally speaking, contribution margin can also be generated by a profit center, including any contribution to fixed costs and profit.

Contribution margin = sales – variable cost

For example, if production units are 20,000, sales are 500,000 currency unit (CU), variable cost per unit is 10 CU, and fixed costs are 200,000 CU:

Contribution margin = sales – (variable cost per unit × number of units)

Contribution margin = 500,000 – (10 × 20,000) = 300,000 CU.

The contribution margin is used to cover the fixed costs incurred during the corresponding period. Once this is done, any remaining amount (the net contribution margin) will contribute to income from operations (operating income).