The contribution margin of a single unit in normal production represents the selling price of the unit less the total variable costs of producing the unit. Variable costs represent the production costs that change based on the quantity of a product produced. Examples of variable costs include, labor, raw materials and sales commissions. You can manually calculate the contribution margin for a unit with basic information about the selling price and variable costs of producing the unit.
1. Determine the selling price of a unit. For example, assume a unit sells for $500.
2. Determine the variable costs of producing the unit. For example, assume that the labor cost of producing the unit is $100, the raw materials used to produce the unit is $200 and sales commission for the unit $50.
3. Subtract the variable costs from the sales price of the unit. Continuing the same example, $500 - $100 - $200 - $50 = $150. This figure represents the contribution margin per unit.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
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