Contribution Margin

In order to understand breakeven analysis, we need to understand what the contribution margin is. We saw the contribution margin when we talked about the variable method for reporting the income statement.

Contribution Margin = Revenue – Variable Costs

Let’s say that you sell a unit for $6 and then your variable costs are $2. That means that your contribution margin is $4. This $4 contribution margin means that for every unit we sell, we are contributing $4 to our fixed costs.