Contribution Margin
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
The contribution margin is the building block behind breakeven analysis. Once you understand it, the rest of breakeven analysis is just applying it.
What is the contribution margin?
The contribution margin is what's left of a sale after covering variable costs — the amount each unit "contributes" toward covering fixed costs (and, once those are covered, toward profit). It's the same figure you see on a variable-costing income statement.
Worked example
Say you sell a unit for $6, and the variable cost to produce it is $2:
Every unit you sell contributes $4 toward your fixed costs.
Why does this matter for breakeven analysis?
Fixed costs don't change no matter how many units you sell. Once enough units have each contributed their $4 to cover those fixed costs, you've broken even — and every unit after that contributes straight to profit. That's exactly how breakeven analysis uses this number: divide fixed costs by the contribution margin per unit, and you get the number of units you need to sell.
Contribution margin is the per-unit number everything else in breakeven analysis is built on. Learn this formula first, and breakeven, target-profit, and margin-of-safety calculations are all just variations on the same idea.
Want the full BEC framework?
My free CPA 101 course covers the study approach I used to score 90+ on every CPA exam section.
More on breakeven analysis
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.