# Unit Contribution Margin Article byKartik Sharma ## What is the Unit Contribution Margin?

Unit contribution margin is the amount of the product selling price over and above the variable cost per unit, to put in simple words it is the selling price of the product minus the variable cost that was incurred to produce the product.

### How to Calculate Unit Contribution Margin?

The formula is as follows:

For eg:
Source: Unit Contribution Margin (wallstreetmojo.com)

Here, the variable costs per unit refer to all those costs incurred by the company while producing the product. These include variable manufacturing, selling, and general and administrative costs as well—for example, raw materials, labor & electricity bills. Variable costs are those costs that change as and when there is a change in the sale. An increase of 10 % in sales results in an increase of 10% in variable costs.

### Unit Contribution Margin Examples

#### Example #1

Let us start by taking an example from the introduction. Also, let us make the assumption that the selling price of a single cupcake is \$20. The variable cost part of making a single cupcake is \$10. Hence, the contribution margin per additional unit of the cupcake will be:

\$20 – \$10 = \$10

It simply means that by selling this cupcake, the net income or profit increases by \$10.

An important point to be noted here is that fixed costs are not considered while evaluating the contribution margin per unit. In reality, there will be a negative contribution to the contribution margin per unit from the fixed costs component.

#### Example #2

Let’s look at another example where a company manufactures furniture set. The required data is as follows:

• The selling price of furniture set = \$ 150
• Variable manufacturing cost = \$ 80
• Variable labour cost = \$ 30
• Variable selling and administrative cost = \$ 10
• Number of units sold during the = 2500

As unit contribution margin formula = Sales per unit – Total Variable costs per unit

= \$ [150 – (80+30+10)]

= \$ [150-120] = \$30

In the above example, Total C0ntribution Margin would be calculated as follows:

• Total contribution margin = Sales Revenue – Total Variable Expenses
• Sales revenue = (Selling price)*(No. of units sold) = 150*2500

Sales Revenue will be:

• Total Variable expense = (Total variable costs per unit)*(no. of units sold)
• = (80+30+10)*(2500)

So, the Total Variable expense will be:

So, Total Contribution Margin = 375000-30000 = \$ 75000

Total Contribution Margin will be:

#### Example #3

In this example, we’ll consider a case where a corporation is into multiple product manufacturing. Consider the below table for the required business data:

Total Variable cost for A = 75000+1150

for B = 150000+2500

Total Variable cost for C = 8000+250

And,

Total Contribution margin for A = \$(100000-76150) = \$ 23850

Total Contribution margin for B = \$(185000-152500) = \$ 32500

So,

Contribution Margin of A = \$ (23850)/ (no. of units of A sold) = \$ 23850/300 = \$ 79.5

Contribution Margin of B = \$ (23850)/ (no. of units of B sold) = \$ 32500/250 = \$ 130

Contribution Margin of C = \$ (23850)/ (no. of units of C sold) = \$ 66750/250 = \$ 267

Note: As we can see here that while the revenue share is largest for Product B, it is Product C which has highest Unit Contribution margin. In effect, it is product C which has the most profitability.