How do we deal with a negative contribution margin ratio when calculating our break-even point?

Definition of Negative Contribution Margin

A negative contribution margin ratio indicates that a company's variable costs and expenses exceed its sales. In other words, if the company increases its sales with the same sales mix, it will experience larger losses.

Example of Eliminating a Negative Contribution Margin

By definition, the ways to eliminate the negative contribution margin include:

  • Increasing selling prices
  • Decreasing the variable costs per unit of product
  • Doing a combination of increasing selling prices and decreasing the variable costs per unit
  • Promoting the products with high positive contribution margins
  • Eliminating the products with negative contribution margins
  • Determining the contribution margins by customer to guide you with further action

When setting prices or bidding for new work, you must think of the bottom line profits, not just the top line sales.