Contribution margin is defined as revenues minus variable expenses. Contribution margin can be calculated for the business as a whole, or on a per-unit basis. The figure is important when finding a company's break-even point. Contribution margin per unit is key to computing net operating income or loss. It is also critical to pricing and production cost decisions.
1. Determine your fixed expenses. Fixed expenses are costs that do not vary from one month to the next. Examples include administrative, equipment, lease or rental and insurance costs. For example, assume a fixed expense of $10,000.
2. Set a target profit figure. To start, you might decide to set a target first-year profit figure of $10,000.
3. Project a unit sales figure. In this case, assume your projection equates to 20,000 units.
4. Calculate the required contribution margin per unit. Contribution margin per unit equals the fixed expenses plus the profits divided by unit sales. Continuing with the example from the previous steps, that means $10,000 plus $10,000 divided by 20,000 equals $1. The required per-unit contribution margin in this example is $1.
- Check your calculation by plugging the figures into the following equation: Contribution margin per unit times unit sales equals fixed costs plus profits.
Items you will need
- Sales revenue, fixed and production cost data
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