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How to Calculate Required Contribution Margin Per Unit

Original post by D. Laverne O'Neal of Demand Media

Contribution margin is defined as revenues minus variable expenses. Contribution margin can be calculated for the business as a whole, or on a per-unit basis. The figure is important when finding a company's break-even point. Contribution margin per unit is key to computing net operating income or loss. It is also critical to pricing and production cost decisions.

Step 1

Determine your fixed expenses. Fixed expenses are costs that do not vary from one month to the next. Examples include administrative, equipment, lease or rental and insurance costs. For example, assume a fixed expense of $10,000.

Step 2

Set a target profit figure. To start, you might decide to set a target first-year profit figure of $10,000.

Step 3

Project a unit sales figure. In this case, assume your projection equates to 20,000 units.

Step 4

Calculate the required contribution margin per unit. Contribution margin per unit equals the fixed expenses plus the profits divided by unit sales. Continuing with the example from the previous steps, that means $10,000 plus $10,000 divided by 20,000 equals $1. The required per-unit contribution margin in this example is $1.

                   

Tips & Warnings

  • Check your calculation by plugging the figures into the following equation: Contribution margin per unit times unit sales equals fixed costs plus profits.

Things Needed

  • Sales revenue, fixed and production cost data
  • Calculator

References

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, health, personal finance and personal growth.

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