Your contribution margin is what is left after taking your variable costs from your sales / revenue. The contribution margin represents what is left to cover your fixed overheads.

It is important that your expenses are properly categorised, i.e., that you make the distinction between your variable and fixed costs.

One of the categories that is often confused is labour / wages. Typically, you will find that most if not all wages are treated as a fixed overhead when in reality some wages should be treated as fixed and some as variable.

Generally any employee that is working directly on the product or services that you are selling should have their wages treated as part of the contribution margin, while support staff or administration staff should form part of your fixed overheads.

The formula is as follows:

Total Sales – Variable costs = Contribution Margin

To get the ratio = Contribution Margin / Total Sales

If you would like to discuss further please contact us:
 McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
 www.mcnamaraandcompany.com.au/contact-us
 Phone +61 3 9428 1062
 Email admin@mcnamaraandco.com

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