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Customer direct contribution margin

Contribution margin (CM) is the amount by which sales revenue exceeds variable costs. It can be calculated as contribution margin per unit as well as total contribution margin, using the following formulas:

Unit CM = Unit Price − Variable Cost per Unit

Total CM = Total Sales − Total Variable Costs

Variable costs are those which vary in proportion to the level of production. Variable cost may be direct as well as indirect. Direct variable cost includes direct material cost and direct labor cost. Indirect variable costs include certain variable overheads.

Total contribution margin can also be obtained by multiplying unit contribution margin by number of units sold. Similarly, contribution margin per unit can also be calculated by divided total contribution margin by number of units sold.

Contribution Margin Ratio

Contribution margin ratio is contribution margin as percentage of sales. It can be calculated as shown in the following formula:

CM Ratio = Unit Contribution Margin Total Contribution Margin
Unit Price Total Sales

Contribution margin and contribution margin ratio are used in the breakeven analysis.

Example

Use the following information to calculate unit contribution margin, total contribution margin and contribution margin ratio:

Price Per Unit $22
Units Sold 802
Total Variable Cost $9, 624

Solution

= 802 × $22 = $17, 644
= $17, 644 − $9, 624 = $8, 020
Contribution Margin Per Unit = $8, 020 ÷ 802 = $10
CM Ratio

Popular Q&A

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What is direct contribution margin?

Contribution Margin is found by subtracting sales by variable costs. It is what left over after you subtract these. Lets say your sales are 10 dollars a unit and your variable cost is 7 dollars per unit. your contribution margin would be 3 dollars. it can be positive or negative in the case you would be losing money. Contribution Margins are used to make short-term business decisions where your fixed costs remain constant.

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What is the difference between the direct labour rate and direct labour hour?

What is the difference between the direct labour rate and direct labour hour for Cost Accounting, when computing the customer margin, using the activity-based costing system?

Direct labor hours is the number of hours a project uses.
Direct labor rate is the labor cost per hour.
You multiply them together to get the direct labor cost.

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