Contribution margin and costing

In short: The contribution margin is the amount a product contributes to covering fixed costs and profit after deducting variable costs. Costing derives the selling price from costs.

In more detail: Contribution margin = net revenue − variable costs. In full costing you add surcharges for overheads and profit; in marginal costing you only look at the contribution.

In Depth

Forward costing (from purchase to selling price):

1. list purchase price
2. − supplier discount → target purchase price
3. − supplier cash discount → cash purchase price
4. • delivery costs → cost price (landed cost)
5. • overheads (percentage) → cost of goods
6. • profit (percentage) → cash selling price
7. • customer discount and commission → target selling price
8. • customer rebate → net selling price
9. • VAT → gross selling price

• Example price floor: Short term it lies at the variable costs, long term at the cost of goods.
• Cash discount: Skonto.
• Backward costing: from the market price to the maximum permissible purchase price.

See also: Break-even analysis, VAT: rates and basic terms