Contribution margin

Write the proposed discount as price changing from p to p′ and quantity from q to q′. If unit variable cost v is unchanged and capacity does not step up, current total contribution is (p−v)q and the proposed contribution is (p′−v)q′. The discount improves this layer only when the latter is larger. Revenue can grow while contribution falls because a lower price reduces the amount each unit leaves. Evaluating the discount requires evidence about demand response and the costs that vary with it.

The comparison must also account for displaced full-price orders, incremental service, returns and capacity requirements. A promotion could generate repeat business or credible demand information, but those benefits need evidence and a horizon. Do not rescue an unattractive current contribution with an unsupported claim about future loyalty. When the relevant data are missing, identify what must be measured instead of filling the model with assumed figures.

For a short-run order with genuinely idle capacity, allocating unavoidable fixed overhead to each unit can conceal positive incremental contribution. For a long-run product decision, ignoring the capacity, support and capital the product requires can conceal a business that never covers its obligations. If fixed cost is F and unit contribution p−v is positive, symbolic break-even quantity is F/(p−v), subject to stable price, mix and cost behavior. It is not a restaurant forecast.

The reported-data exhibit uses McDonald’s FY2024 accounting bridge to demonstrate the boundary problem. These restaurant-margin subtotals can be reconciled to operating income, but their cost definitions do not identify variable cost for an incremental order or conversion. Actual reported figures therefore illustrate what must not be relabeled as contribution.

A positive contribution per sale is not permission to sell unlimited volume. At a bottleneck, compare contribution per scarce unit of capacity, not only contribution per product. A low-margin item can be attractive if it uses very little scarce processing time; a high-margin item can be unattractive if it blocks a better order. Product mix and resource requirements matter.

The linear model also breaks at capacity steps. An extra shift, warehouse lease or support team changes the relevant cost base. Refunds and service usage may rise nonlinearly. Customer contribution should include the service burden attributable to the cohort and the period; a sales-only measure may reward customers who cost more to serve than they generate.

Gross profit follows accounting cost classifications; contribution margin follows the specified variable-cost model. McDonald’s restaurant-margin disclosures deduct occupancy expenses, including depreciation, and exclude some costs below the subtotal. The accompanying [McDonald’s case](/en/breakdowns/mcdonalds-franchise-margins) explains why a useful reported margin can still be the wrong input for a discount or break-even calculation. The public filing does not supply store-level variable costs. [2024 10-K, Restaurant Margins](https://www.sec.gov/Archives/edgar/data/63908/000006390825000012/mcd-20241231.htm).

When cost behavior cannot be established, show a range and the decisions that would change at its boundaries. A precisely calculated margin with uncertain cost inputs is still an uncertain decision.