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How to Calculate Selling Price Using Contribution Margin Variable Costs

Original post by Kathy Adams McIntosh of Demand Media

Contribution margin reporting shares useful information with company managers. Company managers use this information to calculate the breakeven point, or the level of sales required to pay all expenses. Managers also use this information to make decisions, such as agreeing to sell products at a reduced price. The contribution margin equals total revenue minus all variable expenses. It represents the money available to pay fixed expenses, and increase the profits of the business. A contribution format income statement lists the revenue and variable costs, and presents the contribution margin.

Contents

Step 1

Read the contribution format income statement, and locate the contribution margin.

Step 2

Read the contribution format income statement. Locate the variable costs.

Step 3

Add the contribution margin and the variable costs. This calculates the total sales recognized by the company.

Step 4

Review the production report. Locate the total quantity of units produced.

Step 5

Divide the total sales by the total quantity produced -- this calculates the unit selling price.


                   

Tips & Warnings

  • This method assumes the company only sells one product, and that the selling price calculated applies to that product. If the company sells multiple products, you need to use a contribution format income statement by item. This allows you to determine the selling price for a specific item.
  • As you increase the selling price, the contribution margin and net profit also increase. When you decrease the selling price, the contribution margin and net profit also decrease.
  • Businesses use various formats when they create income statements. These include the traditional income statement, the multiple step income statement, and the contribution format income statement. The contribution format income statement is the only one that lists the variable costs and the contribution margin. The other formats require additional analysis to arrive at these numbers.

References

About the Author

Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.


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