What is contribution margin?

Definition

Contribution margin is what remains after you subtract variable costs from the sales those costs helped produce. On the books, this is a leftover used to cover fixed costs, then operating income, not a cash pile and not a Balance Sheet account.

A catering company that bills $8,000 for a wedding and spends $3,200 on food, hourly cooks, and delivery has $4,800 here. The $8,000 is revenue; the $3,200 moves with the job; this leftover is what can cover kitchen rent and a salaried manager.

Cash-basis shops may feel variable spend when they pay the grocer and the crew. Accrual books match those costs to the event, even if some invoices are still open.

This leftover can be read per plate, per job, or for a whole period. It is not gross profit, which subtracts cost of goods sold rather than every cost that moves with sales.

Where it shows up

P&L: Related to what is left of each sale after variable costs.

Balance Sheet: Related to the working-capital costs that move with volume.

See also: Variable Costs · Fixed Costs · Break-Even Point

When you look at your Income Statement, this leftover is not always a printed line. You build it by taking revenue and subtracting the costs that rise and fall with the work.

When the figure is high relative to sales, each job leaves more to cover rent and salaries. When it is low, food was expensive, the crew ran long, or the quote was thin.

The Balance Sheet does not list this leftover. Related food still in the walk-in sits in inventory until the event, and unpaid job costs can sit as bills until you pay them.

On the Statement of Cash Flows, collecting for the wedding and paying the grocer are the cash events. This leftover does not itself move cash.

How it works

The caterer starts with the amount the customer will pay. From that, it subtracts costs that move with the job: food, hourly cooks, delivery fuel, and similar spend.

What remains is contribution margin. Kitchen rent, insurance, and a salaried manager stay out of this subtraction because they do not move with one more plate.

Stay with variable spend when you read this leftover. Gross profit uses cost of goods sold, which can miss hourly cooks or include factory costs that do not move with this week's events.

You can divide the leftover by plates or by jobs. A $4,800 leftover on 120 plates is $40 a plate, which is the same story at a smaller scale.

A higher quote raises this leftover if variable spend stays put. Extra waitstaff or a pricier menu lowers it, even if the billed amount is unchanged.

After the close, this leftover is part of the period's profit story. Add up the jobs, subtract the variable spend, and see what was left for fixed costs.

Keep the event quote, the food invoices, and the crew hours together. Anyone asking why a wedding left $4,800 should see both the billed amount and the costs that moved with it.

Do not treat rent as part of this subtraction. Rent is covered from this leftover; it is not taken out inside it.

A job with a strong leftover can still lose money if fixed costs are large. This figure only tells you what reached the fixed-cost layer, not what reached the bottom line.

Example

A catering company books a wedding for $8,000. Food, hourly cooks, and delivery for that night cost $3,200.

Contribution margin is $4,800. If the kitchen's monthly rent and salaried manager run $12,000, this one job covers $4,800 of that $12,000.

If $400 of unused produce is still in the walk-in, that $400 stays on the Balance Sheet. It is not this wedding's variable cost.

The caterer does not need a separate journal for this leftover. The sales entry and the variable-cost entries already produce the two numbers you subtract.

If the same wedding added $600 of extra waitstaff, variable spend would be $3,800. The leftover would then be $4,200, not $4,800.

Common mix-ups

Contribution margin is not the same as gross profit. Gross profit subtracts cost of goods sold; this figure subtracts costs that move with the work.

Contribution margin is not operating income. Fixed costs still come out after this leftover.

Contribution margin is not cash. A $4,800 leftover can sit in an unpaid invoice while the grocer has already been paid.

Related terms

• Variable Costs: Costs that rise and fall directly with sales volume.
• Fixed Costs: Costs that stay roughly the same regardless of sales volume.
• Break-Even Point: The sales level at which total revenue exactly covers total costs.
• Gross Margin: Gross profit expressed as a percentage of revenue.
• Margin Of Safety: How far sales can fall before the business drops below break-even.
• Pricing: The set price charged to customers for a product or service.
• Departmental P&L: An income statement split by department, location, or product line.
• Operating Income: Profit from core operations before interest and taxes.