Contribution margin is the per-unit profit of a product. It is calculated by subtracting all variable costs to sell a good from its sale price. For example, if a product sells for $20 and its variable costs total $12, it has a contribution margin of $8 per unit.
The variable costs include those directly attached to making or acquiring the goods for sale. Common variable costs include materials or acquisition costs and variable labor costs. The total contribution margin for a given period is the total revenue generated minus the total variable costs for the period. For example, if a business sells $2,000 in goods with $1,200 in variable costs, its total contribution margin is $800. A high contribution margin improves the chances of achieving a net profit.