Contribution margin is the calculation that gives the profitability of an individual product.

Contribution Margin = Revenue - Variable Cost


Revenue reflects income from the specific product line. Variable Cost reflects outlays to produce and sell the product line (input costs, sales commissions, delivery, direct marketing)

Contribution margin helps gauge the success or failure of company's product line by allowing the comparison of one line's profitability to another. If one product has a higher contribution margin than another, the manager has a few options: they may aim to reduce the variable cost or increase the sale price to increase the contribution margin. Or they may discontinue the line altogether.

Contribution margin excludes fixed costs. Fixed are locked-in costs that are not directly associated with sales and considered outside the realm of contribution margin's aim to give a good way to compare product lines side by side.