Contribution margin analysis is affordable a simple tool which value cost/profit/volume analysis. Contribution margin is interpreted as a cost accounting concept which aids a company to decide the rate of profits on individual product.
The term ‘contribution margin’ can be calculated as per unit measure of a product’s gross operating margin, minus from product’s price to total variable cost.
Unit CM = Unit price – Variable cost per unit
Total CM = Total sales – Total variable cost
The calculation of which the company implements this idea in business, as follows,
Product Revenue - Product Variable Costs
In other words, Contribution Margin the way to calculate the exceeding amount of variable cost on sales revenue. In accounting the Contribution, Margin decides how much revenue the company is generating on based of fixed expenses and net income.
Books on Contribution margin analysis
Book 1 –
Managerial Accounting By Carl Warren, James Reeve, Jonathan Duchac (published by Cengage Learning, 2013)
Book 2 –
Cost Management: A Strategic Emphasis By Blocher (published by Tata McGraw-Hill Education, 2006)
How Contribution margin analysis works?
Here is the practical example of Contribution margin analysis, with which the notion of Contribution margin analysis can be unfolded,
Suppose, there is a company, possesses a single product and 80,000 units which are produced and sold during a recent year. $10 was the selling price per unit, and variable manufacturing cost was $3 per unit, and variable SG&A is counted as $1 per unit. The fixed manufacturing costs of the company were $300,000 and fixed SG&A expenses are counted as $90,000. So as a result the company’s contribution margin was $480,000 ($800,000 - $240,000 - $80,000). If the company wants to calculate the margin per unit, the calculation goes like this,
($10 - $3 - $1) = $6
The ratio of the contribution margin is calculated,
($6 / $10 or $480,000/ $800,000) = 60%
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