Contribution margin per unit

Definition

Contribution margin per unit is the amount by which the selling price of a single unit exceeds its variable cost. It helps in determining how much each unit contributes to covering fixed costs and generating profit.

5 Must Know Facts For Your Next Test

1. Contribution margin per unit is calculated by subtracting variable costs per unit from the selling price per unit.
2. It is crucial for break-even analysis, as it indicates how many units need to be sold to cover fixed costs.
3. A higher contribution margin per unit means a company can reach profitability with fewer sales.
4. Contribution margin per unit does not account for fixed costs, only variable costs are considered.
5. It is often used to make decisions about pricing, product lines, and cost control.

Review Questions

• How do you calculate contribution margin per unit?
• Why is contribution margin per unit important for break-even analysis?
• What does a high contribution margin per unit indicate about a company's profitability?

Related terms

Fixed Costs: These are business expenses that remain constant regardless of the number of units produced or sold.

Variable Costs: These are costs that vary directly with the level of production or sales volume.

Break-Even Point: The level of sales at which total revenues equal total costs, resulting in neither profit nor loss.