Contribution margin statement: A tool for profitability analysis
Contribution margin is a business method for analyzing the profitability of products, services or business sectors. It shows the extent to which a product contributes to covering fixed costs and how economic decisions can be based on this. It plays a central role in pricing, production planning and cost management in particular.
What is the contribution margin?
The Contribution margin (DB) Indicates what amount remains from the revenue after deduction of variable costs. It helps to determine when a product is profitable and is used to calculate the Break-even points — i.e. the amount from which the company earns profit.
Calculation:
Contribution margin = revenue - variable costs
Positive contribution margin: Product helps cover fixed costs.
Negative contribution margin: Product causes losses and should be checked.
Simple vs. multi-level contribution margin calculation
The contribution margin calculation can be carried out in various ways:
1. Simple contribution margin calculation
Here, variable costs are deducted from sales revenue. The remaining contribution margin is used to cover fixed costs. If the total contribution margin is higher than the fixed costs, the company makes a profit.
2. Multi-level contribution margin calculation
For more complex cost structures, fixed costs are subdivided further:
- Fixed product costs (directly attributable to a product)
- Area-fixed costs (e.g. for a department)
- Fixed company costs (general fixed costs such as rent, administration)
This method allows a detailed analysis of the profitability of individual products or business areas.
Strategic application in companies
The contribution margin statement is used in various areas of the company:
✅ Pricing policy: Determining minimum selling prices to ensure profitability.
✅ Production planning: Optimizing production volumes to cover fixed costs.
✅ Product range design: Identification of profitable products and targeted portfolio management.
✅ Cost management: Analysis of savings potential by optimising variable and fixed costs.
Sample calculation
A medium-sized company produces two types of bikes:
With fixed costs of 20,000€ The result is the break-even point:
- 67 mountain bikes (20,000€ ÷ 300€ DB) or
- 80 city bikes (20,000€ ÷ 250€ DB)
The company can now strategically decide how to optimally orient its production.
Relative contribution margin in case of bottlenecks
In case of production bottlenecks (e.g. limited machine capacity), the relative contribution marginto select the most profitable products. This is how it is calculated:
relative contribution margin = dB per piece ÷ required resource (e.g. machine time per piece)
In this way, the company can set priorities and use existing resources efficiently.
Conclusion
The contribution margin statement is an essential tool for well-founded business decisions. It enables companies to manage their profitability in a targeted manner, from pricing to optimization of the product portfolio. It contributes to sustainable corporate development, particularly in highly competitive markets.