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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Contribution margin

What is contribution margin, and how does a lender use it to find breakeven?

ONE OF 416 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Contribution margin is revenue less the costs that move with it, such as materials, freight and sales commission, stated as an amount or a share of revenue; it shows what each dollar of lost sales takes off profit. A business with revenue of US$10m, variable costs of US$6m and fixed costs of US$3m has a 40% contribution margin and profit of US$1m: a 10% fall in revenue removes US$400,000, cutting profit by 40%, and breakeven revenue is US$7.5m. Statutory accounts do not split costs this way, so a lender builds the figure from management accounts and tests which costs are truly variable.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// THE FULL PAGE

Contribution Margin: a Worked Example →

Which costs leave with the customer, and which stay behind?

// WHAT IT IS NOT

Operating leverage describes how much of a cost base is fixed; contribution margin is the arithmetic that measures its effect and the figure a breakeven is calculated from. It is also not gross margin, which can include fixed production costs in cost of sales.

// WORKED IN

// NEXT TO IT

READING THE NUMBERS

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