Contribution Margin

Contribution margin (CM) is the amount by which sales revenue exceeds variable costs. It can be calculated as contribution margin per unit as well as total contribution margin, using the following formulas:

Unit CM = Unit Price − Variable Cost per Unit

Total CM = Total Sales − Total Variable Costs

Variable costs are those which vary in proportion to the level of production. Variable cost may be direct as well as indirect. Direct variable cost includes direct material cost and direct labor cost. Indirect variable costs include certain variable overheads.

Total contribution margin can also be obtained by multiplying unit contribution margin by number of units sold. Similarly, contribution margin per unit can also be calculated by divided total contribution margin by number of units sold.

Contribution Margin Ratio

Contribution margin ratio is contribution margin as percentage of sales. It can be calculated as shown in the following formula:

CM Ratio =Unit Contribution Margin=Total Contribution Margin
Unit PriceTotal Sales

Contribution margin and contribution margin ratio are used in the breakeven analysis.

Example

Use the following information to calculate unit contribution margin, total contribution margin and contribution margin ratio:

Price Per Unit$22
Units Sold802
Total Variable Cost$9,624

Solution

Total Sales= 802 × $22 = $17,644
Total Contribution Margin= $17,644 − $9,624 = $8,020
Contribution Margin Per Unit= $8,020 ÷ 802 = $10
CM Ratio= $8,020 ÷ $17,644 = $10 ÷ $22 ≈ 45%

Written by Irfanullah Jan