Contribution margin is the amount of revenue remaining after the variable costs associated with a sale have been deducted. In restaurant menu analysis, contribution margin shows how many dollars an item contributes toward fixed operating costs and profit. It can be measured per item, per cover or across the business.
Contribution margin per item = Selling price − Variable cost per item
Contribution margin ratio = Contribution margin ÷ Selling price × 100
Variable costs may include ingredients, packaging, payment fees or other costs that change with the number of items sold. Which costs are included should be consistent with the restaurant’s accounting and analysis method.
A dish sells for $28 and has an ingredient cost of $9. Its food contribution margin is $19 before any additional variable costs. If packaging and transaction costs add another $1, the contribution margin after those costs is $18.
Food-cost percentage expresses ingredient cost as a share of selling price. Contribution margin expresses the dollars remaining after variable costs. A dish can have a higher food-cost percentage but still contribute more dollars if its selling price is sufficiently high.
Chef’s tip: Do not evaluate menu items using food-cost percentage alone. Review contribution margin, sales volume, preparation labour, waste and the item’s role in the menu.
Key distinction: Contribution margin is the amount left after variable costs; gross profit and operating profit may include additional costs and accounting adjustments.
This term is one of hundreds covered in depth across OCS courses, learning paths, and 1-on-1 coaching with Chef Eric.
