Contribution margin is what you keep from each sale after paying the costs that only exist because you made that unit: ingredients, packaging, gas or power for the batch, waste and any channel commission. If you sell a jar of jam for $7.50 and those costs add up to $3.05, each jar contributes $4.45. That money pays your fixed costs, your time and, if there is enough, your profit. It is the number that tells you whether a price, a discount or a channel is worth it.
The formula
- Contribution per unit = what you keep from the price − variable cost per unit
- Contribution margin (%) = contribution per unit ÷ what you keep from the price
"What you keep from the price" is the price before sales tax and after any commission or card fee. If you sell at a stall for cash with no tax included, it is simply the price.
The two forms answer different questions. In money, it tells you how much each sale adds. As a percentage, it tells you what share of every dollar you take is yours to cover everything else.
What goes into variable cost
Variable cost is everything that goes up when you make one more unit and disappears when you do not produce:
- Ingredients, based on what the batch really uses.
- Jars, lids, labels, bags.
- Gas or power for the batch.
- Waste: units you lose are spread over the units you sell.
- Card fees and channel commissions charged on each sale.
Market pitch fees, your phone, the equipment you already bought and anything you pay whether you sell or not stay out. Those are fixed; if you are unsure about one, see fixed vs variable costs. Your own time stays out of this calculation too, because it is better measured per hour with profit per kitchen hour.
This does not replace loaded cost, which also includes your labour and overhead and is what you use to set a price. They are two tools: loaded cost tells you what to charge; contribution tells you what each sale does for the business.
Worked example: strawberry jam
You make strawberry jam in batches of 12 jars.
| Item | Per batch | Working |
|---|---|---|
| Strawberries | $18.00 | 4 kg × $4.50 |
| Sugar | $3.00 | 2.5 kg × $1.20 |
| Lemons and pectin | $1.80 | |
| Gas for the boil | $1.20 | |
| Batch total | $24.00 |
- Batch cost per jar: 24.00 ÷ 12 = $2.00
- Jar, lid and label: $1.05
- Variable cost per jar: 2.00 + 1.05 = $3.05
- Price: $7.50
- Contribution per jar: 7.50 − 3.05 = $4.45
- Contribution margin: 4.45 ÷ 7.50 = 59.3%
- Contribution per batch: 4.45 × 12 = $53.40
Add the card fee. Most of your market customers pay by card. Say your card reader takes 2%: 7.50 × 0.02 = $0.15 per jar. You keep $7.35, and contribution drops to 7.35 − 3.05 = $4.30, a margin of 4.30 ÷ 7.35 = 58.5%.
Why contribution decides
It tells you how much you need to sell
If the Saturday pitch costs $45, you need 45 ÷ 4.30 = 10.5, so 11 jars just to pay for the stall. Until then you are not making anything that day. That is the idea behind the break-even point, and it comes straight from contribution.
It tells you what a discount really costs
You take $1 off, so the jar is $6.50. The card fee is now $0.13, and contribution falls to 6.50 − 0.13 − 3.05 = $3.32. If you used to sell 40 jars a month, you made 40 × 4.30 = $172. To make the same at the discounted price you need 172 ÷ 3.32 = 51.8, so 52 jars. A 13% price cut asks for 30% more sales just to stand still. What a discount really costs you goes through this in full.
It tells you which channel is worth it
If a delivery app charged a commission (say 25%) on the same $7.50, it would take 7.50 × 0.25 = $1.875. You would keep $5.625, and contribution would fall to 5.625 − 3.05 = $2.575, about $2.58. To keep the same $4.45 as at your stall, you would need to charge (4.45 + 3.05) ÷ 0.75 = $10.00 on the app. The full comparison is in comparing profit by channel.
It helps you compare products, if you look at money and not only percentages
A 1 kg bag of granola that you sell for $14.00 with $7.00 of variable cost brings in $7.00, a 50% margin. That is a lower percentage than the jam, yet each bag contributes more than one and a half times as much as a jar. Which one suits you better depends on how many you sell and how long each takes; that is what contribution per kitchen hour is for.
Contribution margin is not your profit
A positive contribution means each sale adds something. It does not mean the month ends in the black. First the gap of fixed costs and your pay has to be filled. Selling 40 jars a month at $4.30, you contribute $172; if your four Saturday pitches cost $180, you are $8 short before paying yourself anything. The product is healthy per unit, and the business does not pay you yet.
It is also different from markup or margin on loaded cost. Those include your labour and a share of overhead; contribution leaves them out on purpose to show what each sale does.
That is why contribution is the first of four tests in how to know if your food product is profitable, and not the only one.
Do it with the calculator
In the food cost calculator enter the batch recipe, units, waste, packaging, price and commission; with your hourly pay set to 0, the "you earn per unit" figure is your contribution per unit.
Frequently asked questions
What is the difference between contribution margin and profit?
Contribution margin is what each sale brings in before fixed costs. Profit is what is left after paying them. A product can have a healthy contribution margin while the business makes no profit because it does not sell enough.
Does my own time go into variable cost?
For this calculation, your own time is measured separately, as contribution per kitchen hour. If you pay a helper only for the hours they produce, that pay is a variable cost.
Should I calculate contribution margin before or after sales tax?
Before. If your price includes sales tax, take the tax out first and work from what is left. Check your local tax rules or ask an accountant if you are unsure.
What is a good contribution margin?
One that covers your fixed costs and your time at the volume you really sell. That is why it is worth looking at it in money per unit and per hour, not just as a percentage.