How to calculate contribution per unit

Contribution margin is revenues minus all variable costs, which yields the amount of contribution margin available to pay for fixed costs. To calculate the contribution per unit, summarize all revenue for the product in question and subtract all variable costs from these revenues to arrive at the total contribution margin, and then divide by the number of units produced or sold to arrive at the contribution per unit. Thus, the calculation of contribution per unit is:

(Total revenues - total variable costs) / Total units

The concept is useful for determining the minimum possible price at which to sell a product (never below a contribution per unit of zero; you would otherwise lose money with every sale).

The key component of the contribution per unit calculation that can cause difficulty is the variable cost. This should only be those costs that vary directly with revenues. Thus, it should not include any overhead cost, and should rarely include direct labor costs. Typically, variable costs are only comprised of direct materials and any supplies that would not be consumed if the products were not manufactured.

As an example of contribution per unit, ABC International has generated $20,000 of revenues in the most recent accounting period from sales of its purple widget. There are $14,000 of variable costs associated with these revenues, which means that the overall contribution margin for the purple widget was $6,000. Since ABC sold 500 purple widgets, the contribution per unit was $12 (calculated as $6,000 contribution margin / 500 units sold).

Related Topics

Contribution margin 
Direct costing 
Incremental cash flow analysis 
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