How Do You Calculate Contribution Per Unit?
The basic formula for contribution per unit is total revenue minus total variable costs divided by the total units. Contribution per unit describes how the sale of one unit affects a company's net income. Contribution per unit is also known as contribution margin per unit.
- Calculate the overall revenue of the product
Discover the revenue of the product by the sale price multiplied by the number of units sold. For instance, if your company sells 1,000 products at $100 each, the overall revenue is $100,000.
- Determine the variable costs
Calculate the variable costs that go directly into the product, such as materials, supplies, wages and commissions. For example, the aforementioned 1,000 products include $40 of variable costs each. This means the variable costs totaled $40,000.
- Divide by units sold
Take the overall calculations of revenue and costs, and then divide that figure by the units. Revenue of $100,000, minus costs of $40,000, is $60,000 in profit for the product. Take the profit and divide it by 1,000 units for a contribution per unit of $60. This means each unit of your product brings in $60 of profit, not taking into account overhead costs.
- Alter the price based on supply and demand
Raise the price of the product per unit to increase profit, until demand goes down and then lower prices if sales drop. When the margin between revenue and variable costs is smaller, profit per unit decreases. The reverse is also true.