What one more sale is worth

Every business has two kinds of cost. Variable costs rise and fall with each unit sold: materials, packaging, delivery, payment fees, sales commission. Fixed costs stay roughly the same over a month or a year whatever you sell: rent, salaries, software, insurance.

Contribution is the price of one unit less its variable costs. It is what each sale adds towards the fixed costs, and once those are covered, it is profit.

A product that sells for $40 with $10 of variable cost contributes $30. As a share of the price, that is a contribution margin of 75%. Use the percentage to compare products and channels, and the dollar figure to work out how many sales you need.

Contribution sorts costs by how they behave, which is what pricing and volume decisions need. Gross margin on an income statement follows accounting rules instead, and usually includes some fixed production costs, so the two figures rarely match.

The break-even chart

Revenue rises by $40 with each unit and total costs by $10, so the gap between them closes by $30 a unit: the contribution. At 1,000 units the $30,000 of fixed costs is covered, and each unit after that adds $30 of profit.

Two levers move the break-even point. A higher contribution per unit moves it left. Higher fixed costs move it right.