What is the Unit, Variable and Percentage Contribution Margin and how is it calculated?

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Catherine Le Nevez

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The unit contribution margin is the amount of manual or reserved cash in the bank account , which will be used to honor corporate, employer, or service commitments. This will be accomplished after reaching the sales goals.

It is necessary to remember that any national or transnational company. You have to make investments in terms of raw material of the products offered and planned to be manufactured.

Fixed commitments

Therefore, the Contribution Margin it will depend on a company's fixed commitments . These would be the payment of the treasury, the revoked payments for land, public services and workers' allowances such as payrolls and employer deductions.

These investments will generate two very practical options for the company. One will be the profits, which will show which of the offered products had the higher demand and which production line is more satisfactory.

Secondly, the benefits it offers to both employer staff and user-type staff who will appreciate the products presented . This will make it possible to achieve the objectives set in the company budget.

Variable commitments

You need to limit that variable costs are subject to adjustments in the Contribution Margin. This adjustment will be based on the change in the purchase rate of the raw material and on the rate changes in the rates to be paid for transport.

The Contribution Margin is very effective when pricing formulas are based on well-founded business strategies . The big mistake of many is to calculate said profit in assumptions or automatic profits.

The direct actions that each company or consortium has as its objective, when providing a service or selling a product, that the user always feels an advantage . When the company takes this point as its primary starting point, sales will yield steady profits.

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The Contribution Margin can be managed in a simple way using a calculation table. These tables they are substantially the same in all accounting movements of any consortium or company.

To get the contribution margin in a calculation table, it must contain fixed costs, variable costs and profits. Tables or spreadsheets they will be integrated in the accounting books and will be subject to change daily on the occasion of sales.

How to fill out a spreadsheet?

The following example will show how a calculation table or spreadsheet should be presented, which will be compiled following the pattern from investment by raw material to profits. This example is very simple, it is like a champion to perform accounting calculations .

At the beginning, note the time to be considered as the accounting period, the date and place, as well as the number of continuous pages based on this worksheet. The information must be clear, smudge-free and legible .

The first column it must be called Fixed Costs. Rent of the premises, periodic preventive maintenance of the machinery or equipment that will process the raw material, payrolls and basic monthly services.

In second column Variable Costs must be recorded. Value of the raw material, compensation for transport services, compensation for unforeseen events, both mechanical and human, compensation for training courses.

In third column the results of the percentage that will be obtained for the assigned value and investment will be displayed. This amount of the percentage applied to the products and / or costs will be reflected in visible and exact numbers.

How is the contribution margin calculated?

Practical example , the Virtual Company receives $ 900.000 by selling 100.000 3D fun kits. The variable unit cost is $ 3, which equates to $ 900.000 / 100.000 resulting in $ 9 per unit. While the unit variable cost is $ 3.

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Il gross margin that would be the unit selling price minus the variable cost per unit ($ 9- $ 3) resulting in $ 6. Therefore, the Total Contribution Margin would be $ 6 per 100.000 units sold, giving $ 600.000.

L' percentage indicator would remain at 66%, taken by calculating the Total Contribution between sales or $ 600.000 / $ 900.000. Therefore, the company's mission and vision for the products on offer make it a profitable business.

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