How to Calculate Contribution Margin: A Step-by-Step Guide with Example and Formula

How to calculate contribution margin

Revenues Variable costs:Beg. inventory Variable manufacturing costsCost of goods available for saleLess: Ending inventory Variable costs of good sold Variable operating costsTotal Variable costsContribution margin

To calculate the contribution margin, you need to follow the below steps:

Step 1: Determine the selling price of the product or service per unit.

Step 2: Identify the variable cost associated with the product or service. These costs vary with the level of production or sales volume. Examples of variable costs include direct materials, direct labor, and variable overhead expenses.

Step 3: Subtract the total variable cost per unit from the selling price per unit to get the contribution margin per unit.

Step 4: Calculate the contribution margin ratio by dividing the contribution margin per unit by the selling price per unit.

The formula for calculating the contribution margin is as follows:

Contribution Margin = Selling Price per Unit – Variable Cost per Unit

For example, let’s say a company sells a product for $50 per unit. The variable costs associated with producing each unit of the product are $30. To calculate the contribution margin, we subtract the variable cost ($30) from the selling price ($50), to get the contribution margin of $20 per unit.

Contribution Margin Ratio = (Contribution Margin per Unit / Selling Price per Unit) x 100

Using the above example, the contribution margin ratio would be calculated as follows:

Contribution Margin Ratio = ($20 / $50) x 100 = 40%

The contribution margin ratio indicates how much of each dollar in sales goes towards covering the fixed costs of a business. Higher contribution margin ratios suggest that more of each dollar in sales is available to cover fixed costs and ultimately generate a profit, while lower ratios suggest that a company’s pricing and/or variable costs may need to be reevaluated.

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