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Closing Techniques # How Contribution Margin is Calculated

, updated on July 03, 2023 Contribution margin is the selling price of a unit minus variable cost per unit. This represents the amount that each sale pays down your fixed costs eventually resulting in profit if you sell enough units. Contribution margin is used in a wide range of management calculations to model profitability and to make marketing and operations decisions.

## Calculation

The formula for calculating contribution margin is:
Contribution margin = Unit Price - Unit Variable Cost

## Unit Price

Unit price is the gross revenue you get from selling one unit. This is often calculated as an average selling price after all discounts.

## Unit Variable Cost

Unit variable costs includes cost of goods sold, sales commissions and any other costs that can accurately be broken down by unit such as delivery costs.

## Fixed Costs

Fixed costs include any costs of running your business not included in unit variable costs. In other words, fixed costs include any overhead that is difficult to accurately break out by unit. Common examples include administration, advertising, depreciation, insurance, rent, utilities and wages not directly included in cost of goods sold.

## Example

The variable costs for selling a handcrafted wooden canoe are \$2300 including costs of goods sold, sales commissions and delivery charges. On average each unit sells for \$3500 after discounts. Contribution margin is calculated as:
Contribution margin = 3500 - 2300 = \$1200

## Break-Even Volume

Break-even volume is the number of units you need to sell to cover your fixed costs.
break even volume = fixed cost / contribution margin
In the example above, the company that produces the canoes has fixed costs of \$24,000 per quarter. Based on this it is possible to calculate the number of units they need to sell to break-even:
break even volume = \$24,000 / \$1200 = 20
The company has to sell 20 units to break-even.

## Contribution Margin Ratio

It is common to represent contribution margin as a ratio with the formula:
contribution margin ratio = contribution margin / price
In the example above, the price of each canoe was \$3500 and contribution margin was \$1200 yielding a contribution margin ratio of:
contribution margin ratio = 1200/3500 = 0.3429
It is common to represent this as a percentage by multiplying by 100:
contribution margin ratio = (1200/3500) × 100 = 34.29%
Contribution margin ratio can also be based on total contribution margin and total revenue.
contribution margin ratio = total contribution margin / total revenue
For example, if the canoe company sold 40 canoes with a total contribution margin of \$48,000 and total revenue of \$140,000:
contribution margin ratio = (48,000/140,000) × 100 = 34.29%
 Overview: Contribution Margin Calculation Type Definition The selling price of a unit minus variable cost per unit. Also Known As Dollar contribution per unit Related Concepts

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