Each taco sold contributes $3 toward covering his fixed costs. His contribution margin per taco is $3 (i.e., $5 selling price minus $2 variable costs). In other words, the per-unit contribution margin for a product is the amount that each unit of sales contributes toward the company’s profits.ĮXAMPLE: Joe sells his tacos for $5 each. The per-unit contribution margin for a product is the difference between the product’s selling price and the per-unit variable costs necessary to produce the product.Ĭontribution margin per unit = Selling price – Variable cost per unit Joe’s contribution margin is $6,000 (i.e., his revenue minus his variable costs).Ĭontribution margin is particularly helpful when looked at on a per-unit basis. In the month of July, his fixed costs were $900, his total variable costs were $4,000, and his revenue was $10,000. The difference between a business’s revenues and total variable costs is referred to as its “contribution margin.” That is:Ĭontribution margin = Sales – Variable costsĮXAMPLE: Joe has a food truck from which he sells tacos. Revenue and total variable costs are the two things that change as a business’s sales/production volume changes.
The following is an adapted excerpt from my book Cost Accounting Made Simple: Cost Accounting Explained in 100 Pages or Less.
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