How to Calculate Contribution Margin per Unit and in Total

The term “contribution margin” refers to a commonly used concept in cost accounting. Each company uses the concept to determine the profitability of each individual products manufactured by it. The contribution margin can be calculated in a gross manner for a specific category or line of products as well as per each unit of the products. You can calculate the contribution margin of a particular product by deducting its total variable costs from the product’s selling price. The concept of contribution margin is also of great significance for taking various decisions related to production and sales. Each business tries to increase the contribution margin of a product to enhance its revenues and profits. But the contribution margin can be increased only with an increase in the selling price of the product or with a decrease in the variable costs. Sometimes a business manager may decide to drop a product line up, if the contribution margin is lower in comparison to other lines of products.

Instructions

A product’s per unit contribution margin is difference between its price and variable costs. Once you calculate the contribution margin per unit, the figure can be multiplied by the total number of units sold. The same can be explained by means of the equation: “A Product’s Total Contribution Margin = Contribution Margin per Unit x Units Sold “. For example, if a particular product’s contribution margin per unit is $60 and the business has sold 12000 units, then the total contribution margin is: $60 X 12000 = $720000. So for calculating the total contribution margin for a specific product line up, you have to determine the product’s contribution margin per unit.
The contribution margin per unit of a product is calculated by deducting the variable costs per unit from the selling price of the product. The term variable cost refers to the costs that change in proportion to an increase or decrease in the volume of units produced. For instance, the cost of fuel changes in proportion to the number, length and duration of the flights. So for an airline the cost of fuel is a variable cost. However, for a manufacturing company the variable cost is calculated by summing up the cost of direct material, direct labor and overheads. Normally, these costs vary and changes in a direct proportion to the changes in the volume of total production.
A product’s per unit contribution margin can be determined by using the formula: “Contribution Margin per Unit = the Price – Variable Costs per Unit”. The same can be explained by means of an example. If material, labor and over head cost for a product are $ 5, $ 4, and $3 respectively. The amount of variable cost will be: material + labor + overhead = $ 15 + $12 + $9 = $36. If the selling price of the product is $60, then the contribution per unit is: $60 – $36 = $24. The equation can further be elaborated as: “Contribution Margin per Unit = the Price – (Direct Material + Direct Labor + Overhead)”.