How to calculate contribution margin?

To calculate the contribution margin, we must deduct the variable cost per unit from the price per unit. For instance, in Year 0, we use the following formula to arrive at $60.00 per unit. 3. Contribution Margin Ratio Calculation Example Next, the CM ratio can be calculated by dividing the amount from the prior step by the price per unit.

What is contribution margin ratio?

The contribution margin ratio is the total contribution margin divided by total sales. It is also known as the profit-volume (P/V) ratio. The contribution margin is the amount of revenue in excess of variable costs. One way to express it is on a per-unit basis, such as standard price (SP) per unit less variable cost per unit.

What does a contribution margin ratio of 40% mean?

A contribution margin ratio of 40% means that 40% of the revenue earned by Company X is available for the recovery of fixed costs and to contribute to profit. The remaining 60% is consumed by variable costs. The break-even point (BEP) is calculated using the contribution margin ratio. The formula is: BEP = Fixed costs / P/V ratio = 40,000 / 40%