Unit contribution margin

Definition

Unit contribution margin is the amount each unit sold contributes towards covering fixed costs after variable costs are subtracted. It is calculated as the selling price per unit minus the variable cost per unit.

5 Must Know Facts For Your Next Test

1. Unit contribution margin helps managers understand how much profit each unit sold generates before fixed costs are applied.
2. It is a crucial component in break-even analysis, which determines the number of units needed to cover all costs.
3. Higher unit contribution margins indicate more profitability per unit.
4. The formula for unit contribution margin is: Unit Contribution Margin = Selling Price per Unit - Variable Cost per Unit.
5. Knowing the unit contribution margin aids in making informed decisions regarding pricing, product mix, and resource allocation.

Review Questions

• How do you calculate the unit contribution margin?
• Why is the unit contribution margin important in break-even analysis?
• What does a higher unit contribution margin indicate about a product's profitability?

Related terms

Contribution Margin Ratio: The ratio of total contribution margin to total sales revenue, indicating the percentage of sales that contributes to fixed costs and profit.

Total Contribution Margin: The overall amount available to cover fixed expenses and generate profit, calculated as total sales minus total variable costs.

Fixed Costs: Costs that do not change with the level of production or sales volume, such as rent, salaries, and insurance.