How do I calculate unit contribution margin?

The unit contribution margin is the remainder after all variable costs specifically associated with a single unit of sale (whether it be a product or services rendered) are subtracted from the associated revenues. The amount of variable expense to use in the unit contribution margin calculation varies considerably, depending on the situation. Consider these examples:

• At the individual unit level for products, the only variable costs are usually for the direct materials and supplies that are consumed in the production process. Labor is not considered a variable cost at the individual unit level, unless employees are being paid based on the number of units produced (such as under a piece rate pay plan).
• At the individual unit level for services (such as for one billable hour of work) there may be no variable cost at all if the person performing the work is salaried, since that person will be paid irrespective of providing the service.
• If a person is paid based on the time worked on a specific billable service, then the variable cost is his or her hourly wage and related payroll taxes - those costs that the company would not otherwise incur if it did not provide the unit of service.

The unit contribution margin is useful for establishing the minimum price at which to sell a unit (which is the variable cost). However, this cost may change if a specific sale transaction includes more than one unit, since purchasing or production efficiencies may then reduce the variable cost, resulting in a different contribution margin. Thus, the unit contribution margin may not be relevant for pricing decisions in unit quantities of greater than one.

Related Topics

Breakeven point
Contribution margin
Contribution margin ratio
Gross profit ratio
Net profit ratio