ECONOMICS

Detailed explanation-1: -In the above example we calculated contribution per unit by subtracting variable cost per unit from selling price per unit.

Detailed explanation-2: -Contribution margin is calculated as Revenue-Variable Costs. The contribution margin ratio is calculated as (Revenue-Variable Costs) / Revenue.

Detailed explanation-3: -The contribution margin formula is a relatively simple calculation: Contribution margin = Revenue – Variable Costs. However, you can also work out contribution margin as a percentage of sales. To do that, here’s the contribution margin ratio formula: Contribution Margin Ratio = Revenue – Variable Costs / Revenue.

Detailed explanation-4: -Thus, the calculation of contribution per unit is: (Total revenues-Total variable costs) ÷ Total units = Contribution per unit. When only one product is being sold, the concept can also be used to estimate the number of units that must be sold so that a business as a whole can break even.

Detailed explanation-5: -Contribution is the amount of earnings remaining after all direct costs have been subtracted from revenue. This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs equals the profit earned.