Unit Contribution Margin

Reviewed byDheeraj Vaidya, CFA, FRM

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:

Unit Contribution Margin

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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.

Explanation of Contribution Margin in Video


Unit Contribution Margin Examples

Example #1

Let us start by taking an example from the introduction. Also, let us assume 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

Unit Contribution Margin Example 1

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. As a result, 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 sets. The required data is as follows:

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

= $ [150 – (80+30+10)]

Unit Contribution Margin Example 2

= $ [150-120] = $30

Unit Contribution Margin Example 2-1

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

  • Total contribution margin = Sales Revenue – Total Variable Expenses
  • Sales revenue = (Selling price)*(No. of units sold) = 150*2500
Unit Contribution Margin Example 2-2

Sales Revenue will be:

Unit Contribution Margin Example 2-3
  • Total Variable expense = (Total variable costs per unit)*(no. of units sold)
  • = (80+30+10)*(2500)
Unit Contribution Margin Example 2-4

So, the Total Variable expense will be:

Unit Contribution Margin Example 2-5

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

Unit Contribution Margin Example 2-6

Total Contribution Margin will be:

Unit Contribution Margin Example 2-7

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:

(S)Product AProduct BProduct C
Sales Revenue10000018500075000
Cost of Goods Sold750001500008000
Admin Costs & Misc.11502500250
No. of Units Sold300250250

Total Variable cost for A = 75000+1150

Unit Contribution Margin Example 3
Unit Contribution Margin Example 3-1

Total Variable costTotal Variable CostTotal variable cost is the total of all variable costs that would change in proportion to the output or the production of units and helps analyze the company's overall costing and profitability. Total variable cost formula = number of units produced x variable cost per unit.read more for B = 150000+2500

Unit Contribution Margin Example 3-6

Total Variable cost for C = 8000+250

Unit Contribution Margin Example 3-7


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

Example 3-8

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

Unit Contribution Margin Example 3-9

Total Contribution marginContribution MarginThe contribution margin is a metric that shows how much a company's net sales contribute to fixed expenses and net profit after covering the variable expenses. As a result, we deduct the total variable expenses from the net sales when computing the contribution.read more for C = $(75000-8250)= $ 66750

Example 3-10


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

Example 3-11

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

Example 3-12

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


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

How is the Unit Contribution Margin Helpful to a Business?


While the contribution margin per unit formula is beneficial for managers to consider while maximizing their profits, making decisions solely based on it or even cutting out on products with the lowest margin might not always be right. Managers should also consider the fixed costThe Fixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more associated with the production alongside.

Overall, it provides valuable information when used with other parameters in making major business decisions.

This article has been a guide to Unit Contribution Margin and its meaning. Here we discuss the formula to calculate Contribution Margin per unit and how it is helpful to a business. You may learn more about financial analysis from the following articles –