In one sentenceThe selling price minus the variable cost per unit; it is what each item contributes toward covering fixed costs and then generating profit.
Simply put
When you sell a unit, its variable cost (materials, packaging and commission) goes immediately, and what remains is the contribution margin. This amount pays the rent and salaries and then becomes profit.
It is also shown as a percentage of the selling price (the contribution margin ratio), which is useful for seeing how an increase in sales in riyals affects profit.
Worked example
A restaurant sells a meal for 40 SAR, and its variable cost is 25 SAR.
Contribution margin per meal = 40 − 2515 SAR
Contribution margin ratio = 15 ÷ 4037.5%
Contribution of 1,000 meals = 1,000 × 1515,000 SAR
Contribution margin per meal15 SAR
Formula: Unit selling price − Unit variable cost
Don't confuse it with
Gross profit marginGross profit deducts the entire cost of sales (which may include fixed costs), while contribution margin deducts variable costs only.