Contribution Margin Formula (Table of Contents)
Contribution Margin Formula
Contribution is a significant concept every business owner should understand. To calculate contribution margin, all we need to look at are the net sales and the total variable expenses. Here’s the formula for contribution margin –
Along with finding out the contribution, we can also calculate the contribution per unit and the contribution ratio.
Contribution Margin Formula Example
Let’s take a practical example which will illustrate this contribution margin formula.
Goodey Company has net sales of $300,000. It has sold 50,000 units of its products. The variable cost of each unit is $2 per unit. Find out the contribution, contribution per unit, and contribution ratio.
We will simply use the contribution formula to find out the contribution per unit and contribution ratio.
- Company has net sales of $300,000.
- Number of units sold was 50,000 units.
- Selling price per unit would be = ($300,000 / 50,000) = $6 per unit.
- Variable cost per unit is $2 per unit.
- Contribution per unit would be = (Selling price per unit – Variable cost per unit) = ($6 – $2) = $4 per unit.
- Contribution would be = ($4 * 50,000) = $200,000.
- Contribution ratio would be = Contribution / Sales = $200,000 / $300,000 = 2/3 = 66.67%.
In this example, if we would have been given the fixed expenses, we could also be able to find out the net profit of the firm.
Explanation of Contribution Margin Formula
Contribution is a measurement through which we can understand how much company’s net sales will contribute to the fixed expenses and the net profit after covering the variable expenses. So, while calculating the contribution, we deduct the total variable expenses from the net sales.
Doing that allows us to look at the fixed expenses and net profit. Contribution, thus, can be expressed in another way as well.
We can easily say that –
In situations, where there’s no way we can know the net sales, we can use the above formula to find out the contribution.
Use of Contribution Margin Formula
You may ask why we need contribution. We need contribution to find out the break-even point.
We will look at how contribution becomes useful in finding out the break-even point.
Let’s say that a firm’s fixed expenses are $100,000. The variable cost of the firm is $30,000. We need to find out the break-even point.
By using the concept of contribution, we will find out the break-even point.
Here, we can write –
Net Sales – Variable Cost = Fixed Cost + Net Profit
At break-even point, the key assumption is that there will be no profit or no loss.
- Net Sales – Variable Cost = Fixed Cost + 0
- Or. Net Sales – $30,000 = $100,000
- Or, Net Sales = $100,000 + $30,000 = $130,000.
That means at $130,000 of net sales, the firm would be able to reach the break-even point.
Contribution Margin Calculator
You can use the following Contribution Margin Calculator
|Contribution Margin Formula =||Net Sales – Total Variable Expenses|
|0 – 0 =||0|
Contribution Margin in Excel (with excel template)
Let us now do the same example above in Excel. You must simply use the contribution formula to find out the contribution per unit.
You can easily calculate the ratio in the template provided.
The contribution per unit would be = (Selling price per unit – Variable cost per unit)
The contribution would be = (Margin per Unit * Number of Units Sold)
The contribution ratio would be = margin / Sales
You can download this Contribution Margin Ratio template here – Contribution Margin Ratio Excel Template
This has been a guide to Contribution Margin formula, Contribution margin calculator, along with examples and excel templates. You may also look at the following articles to enhance your financial skills.
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