Contribution Margin: Formula, P/V Ratio & Example
Definition
Contribution margin is selling price minus variable cost. It is the amount each sale contributes first towards fixed costs and then to profit; as a percentage of sales it is called the contribution margin ratio or P/V ratio.
| Term | Contribution margin |
|---|---|
| In Hindi | अंशदान (योगदान) मार्जिन |
| Area | Accounting |
| Search phrase | contribution margin |
| Try it | Break-even calculator |
अंशदान (योगदान) मार्जिन — हिंदी में अर्थ
अंशदान मार्जिन बिक्री मूल्य घटा परिवर्ती लागत है। यह वह राशि है जो हर बिक्री पहले स्थिर लागत को और फिर लाभ को देती है; बिक्री के प्रतिशत के रूप में इसे P/V अनुपात कहते हैं।
Formulas
Contribution per unit = Selling price − Variable cost per unit. Total contribution = Sales − Total variable cost = Fixed cost + Profit. P/V ratio = Contribution ÷ Sales × 100. Break-even units = Fixed cost ÷ Contribution per unit; break-even sales = Fixed cost ÷ P/V ratio.
Variable costs move with output — raw material, consumables, power used by machines, piece-rate labour, packing, freight out. Fixed costs stay the same over a range — rent, salaries, interest, depreciation.
How factories use it
Contribution decides which products to push when capacity is short (rank by contribution per machine hour, not per unit), whether to accept a low-price export or bulk order (yes if price covers variable cost and capacity is idle), and whether to make or buy a component. A product with a thin margin after fixed-cost allocation can still have healthy contribution.
Example
A panel sells for ₹500 with variable cost ₹300: contribution ₹200 per unit, P/V ratio 40%. Fixed costs ₹6,00,000 a month → break-even = 6,00,000 ÷ 200 = 3,000 units, or ₹15,00,000 of sales. At 4,000 units, profit = 1,000 × ₹200 = ₹2,00,000.
Related tools and guides
Frequently asked questions
What is contribution margin in simple words?
What is left from each sale after paying its variable costs, available to cover fixed costs and then give profit.
What is the P/V ratio?
Profit/volume ratio — contribution as a percentage of sales. It is the same as the contribution margin ratio.
How is contribution different from gross profit?
Gross profit deducts cost of goods sold, which includes fixed factory overheads. Contribution deducts only variable costs.
Can contribution be negative?
Yes, if price is below variable cost — then every unit sold increases the loss, and the order should usually be refused.
Related terms
- Accounts receivableAccounts receivable is the money customers owe a business for goods or services already supplied on credit. It is shown as trade receivables (debtors) under current assets.
- Accrual vs cash basis of accountingUnder the accrual (mercantile) basis, income and expenses are recorded when they are earned or incurred, whatever the payment date. Under the cash basis, they are recorded only when cash is actually received or paid.
- Balance sheetA balance sheet is a statement of what a business owns (assets) and what it owes (liabilities and owners' equity) on a particular date. Total assets always equal total equity plus liabilities.
- Cash conversion cycleThe cash conversion cycle (CCC) is the number of days between paying for raw material and collecting cash from the customer for the finished goods: days inventory outstanding plus days sales outstanding minus days payables outstanding.
- Contra entryA contra entry is a transaction between cash and bank accounts of the same business — such as cash deposited into the bank or cash withdrawn for office use — where both the debit and the credit side are cash or bank.
- Cost of goods sold (COGS)Cost of goods sold (COGS) is the direct cost of the goods a business sold in a period: Opening stock + Purchases + Direct expenses − Closing stock.