A product or service, like a player in a sports team, will be able to contribute in a certain way to the outcome. If he is a star player, he could increase the team’s chances of victory. Similarly, a product’s ability to sell and bring in profits for the company is what makes up its contribution margin. As a formula, you can calculate it by looking at a product’s price and subtracting its total variable costs.
For example…
Let’s say Tina decides to sell her handmade precious stone necklaces for $50 each. The variable expenses of sourcing her materials for each necklace is $8. The variable labour cost is about $15 and the variable overhead cost is $7 per necklace. To calculate the necklace contribution margin, subtract all the variable costs from $50 and you’ll end up with $20.
