Contribution margin per unit is the sales price per unit less variable cost per unit. Variable costs include all sorts of costs that are directly associated with the level of activity or sales. Contribution margin per unit is the basis of calculating the break-even point in sales in break-even analysis. If we divide the fixed cost by contribution margin per unit we will get the break-even units.
Contribution margin per unit = Selling price per unit – Variable cost per unit
Assume a bakery sells bread for $5.00. The variable costs include:
Gas charges $0.5 per unit
Flour charges $0.25 per unit
Baker labor $0.75 per unit
Total Variable cost $1.50 per unit
Contribution margin per unit = $5.00 - $1.50 = $3.50 per unit
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