As we know that contribution margin is a financial calculation that is calculated by subtracting all the variable costs from the revenues. The contribution margin is calculated to pay it for the fixed costs that remain same for all the number of units produced. In order to calculate contribution margin per unit first of all we have to calculate contribution margin by subtracting all the variable costs from the acquired revenue. In the next step we will divided the resultant figure with the number of units produced to find out the contribution margin per unit. Thus the formula of contribution margin per unit can be shown as under
Contribution Margin per unit = Total Revenues – Variable Costs/ Number of Units of product
The concept of contribution margin is important to calculate the minimum possible amount on which a product must be sold to recover all its costs. The contribution margin per unit should never be less than zero as if the contribution margin becomes less than zero it will result in the loss while selling the product.
The concept of contribution margin per unit can also be used to calculate the number of units that must be sold by the company in order to attain breakeven point. For example if a company is producing goods at $10,000 fixed costs and the contribution margin related to each unit sold is $5 the company has to sell 2000 units to recover its fixed costs and reach breakeven point.
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