Table of contents
What is the contribution margin?How to calculate the contribution margin and the contribution margin ratio?Using the contribution margin formulas - exampleWhy is the contribution margin useful?Some other helpful tools for businessIf you need to estimate how much of your business's revenues will be available to cover the fixed expenses after dealing with the variable costs, this calculator is the perfect tool for you. You can use it to learn how to calculate contribution margin, provided you know the selling price per unit, the variable cost per unit, and the number of units you produce. The calculator will not only calculate the margin itself but will also return the contribution margin ratio.
What is the contribution margin?
In accounting, contribution margin is the difference between the revenue and the variable costs of a product. It represents how much money can be generated by each unit of a product after deducting the variable costs and, as a consequence, allows for an estimation of the profitability of a product.
How to calculate the contribution margin and the contribution margin ratio?
The contribution margin formula is quite straightforward. All you have to do is multiply both the selling price per unit and the variable costs per unit by the number of units you sell, and then subtract the total variable costs from the total selling revenue.
To put it shortly:
CM=(SPunit×U)−(VCunit×U)
where:
- CM — Contribution margin;
- SPunit — Selling price per unit;
- U — Number of units; and
- VCunit — Variable costs per unit.
Knowing how to calculate contribution margin allows us to move on to calculating the contribution margin ratio. To get the ratio, all you need to do is divide the contribution margin by the total revenue.
CMratio=CM/(SPunit×U)
where:
- CMratio — Contribution margin ratio.
The contribution margin is given as a currency, while the ratio is presented as a percentage.
Using the contribution margin formulas - example
Let's say we have a company that produces 100,000 units of a product, sells them at $12 per unit, and has a variable costs of $8 per unit.
CM=($12×100,000)−($8×100,000)=$400,000
Now, let's calculate the contribution margin ratio.
CMratio=$400,000/($12×100,000)=0.3333
In other words, the contribution margin ratio is 33.33%.
Why is the contribution margin useful?
Knowing how to calculate the contribution margin is an invaluable skill for managers, as using it allows for the easy computation of break-evens and target income sales. This, in turn, can help people make better decisions regarding product & service pricing, product lines, and sales commissions or bonuses.
Aside from the uses listed above, the contribution margin's importance also lies in the fact that it is one of the building blocks of break-even analysis. With that all being said, it is quite obvious why it is worth learning the contribution margin formula.
Some other helpful tools for business
The contribution margin and contribution margin ratio are not the only important values for a business. We have several similar tools that you may find useful. Check out the items from this list if you want to get more information:
Profit margin tells you the percentage of the revenue that remains after the deduction of all expenses such as taxes, interest, etc. Careful analysis of this value can provide invaluable insight into the workings of a company and point to any changes that might need to be made. Use our profit margin calculator to check this value for your company.
No business can operate without taking value-added tax into account. This tax is applied to goods and services, hence its other name (used especially in Australia) - the goods and services tax. Feel free to use both our VAT calculator and our GST calculator to figure out the value of the tax.
Use the margin and VAT calculator if you need to calculate profit margin and VAT at the same time - it's a real time-saver!
Another handy, time-saving tool you may want to check out is the profit margin with discount calculator, which will help you calculate the profit margin and the discount at the same time.
Related calculators
