How to Calculate Contribution Margin?
What is contribution margin?
In cost-volume-profit analysis of managerial accounting contribution margin is a very concept. The evaluation of contribution margin for any product is quite easy yet its usage is wide and when applied with various other metrics of CVP analysis such as PV Ratio, Break Even Point, variable cost, fixed cost, etc it helps to take major production decisions relating to volume of production and sales, and profitability of such levels of sales or production.
Step 1: Get acquainted with contribution margin calculation
Contribution margin is the amount of money generated by selling a product over its variable cost of production. Therefore, mathematically it can be said that the revenue earned by a product minus its variable cost gives the contribution margin. Generally, the contribution margin is calculated on per unit basis by subtracting the variable cost per unit of the product from the revenue earned per unit or selling price of the product.
Step 2: Calculate unit revenue or price of the product under question
Determination of per unit revenue is quite easy. It is the per unit selling price of any product. Therefore, if you know the per unit selling price then it is your revenue earned per unit of the product. However, if per unit price is unknown then dividing total sales by the number of units produced can also fetch you the per unit price. It is better to calculate the per unit revenue because contribution margin is generally calculated on per unit basis.
Step 3: Determination of the variable cost of the product under question
Variable cost refers to costs that vary depending upon the level of production. Therefore, with change in the level of output the variable cost changes. Variable costs are related to the variable factors of production. In the shorter term the levels of whichever factors of production can be changed are variable. As compared to variable costs, fixed costs are the expenses related to the fixed factors
In cost-volume-profit analysis of managerial accounting contribution margin is a very concept. The evaluation of contribution margin for any product is quite easy yet its usage is wide and when applied with various other metrics of CVP analysis such as PV Ratio, Break Even Point, variable cost, fixed cost, etc it helps to take major production decisions relating to volume of production and sales, and profitability of such levels of sales or production.
Step 1: Get acquainted with contribution margin calculation
Contribution margin is the amount of money generated by selling a product over its variable cost of production. Therefore, mathematically it can be said that the revenue earned by a product minus its variable cost gives the contribution margin. Generally, the contribution margin is calculated on per unit basis by subtracting the variable cost per unit of the product from the revenue earned per unit or selling price of the product.
Step 2: Calculate unit revenue or price of the product under question
Determination of per unit revenue is quite easy. It is the per unit selling price of any product. Therefore, if you know the per unit selling price then it is your revenue earned per unit of the product. However, if per unit price is unknown then dividing total sales by the number of units produced can also fetch you the per unit price. It is better to calculate the per unit revenue because contribution margin is generally calculated on per unit basis.
Step 3: Determination of the variable cost of the product under question
Variable cost refers to costs that vary depending upon the level of production. Therefore, with change in the level of output the variable cost changes. Variable costs are related to the variable factors of production. In the shorter term the levels of whichever factors of production can be changed are variable. As compared to variable costs, fixed costs are the expenses related to the fixed factors