Contribution Margin

What is unit contribution margin?

Contribution margin is the amount available after we deduct variable costs associated with the units sold from the sale .When we represent this in per unit it is called unit contribution margin .Thus unit contribution margin represents selling price per unit less variable costs per unit. We can express this is an equation as follows-

Unit contribution margin = Selling price per unit – Variable cost per unit.

How it is used in computing the unit breakeven point.

Breakeven point refers to the level of operation where there is no profit or loss. Thus it is a point where the revenue earned by a company equals its variable and fixed costs. Thus in terms of unit it denotes activity level (units) at which the total costs equals total sales revenue.

The unit contribution margin can be used to calculate breakeven point in units by dividing the total fixed costs by unit contribution margin.

Formula:

Breakeven point (units) = total fixed costs/ contribution margin per unit.

What is contribution margin ratio and when is it most useful

Contribution margin also referred to as profit – volume analysis can be either is represented in unit terms or in ratios. The contribution margin ratio is the percentage of contribution over total revenue. This percentage can be calculated by either using per unit data or in terms of total contribution over total sales

Formula:

Contribution margin ratio = Contribution per unit/ selling price per unit

Contribution margin ratio = Contribution / sales

How is it useful

1) Contribution margin ratio is most useful when one makes an analysis of cost –volume –profit. This ratio simplifies calculation of net income and helps in analyzing break even.

2) This ratio can be used by managers to make decisions like whether to add a product line, how to price a product or service or decisions like how to structure sales commissions or bonuses.

3) Contribution ratio can be used to calculate the...