Someone asks you to explain what contribution margin per unit is and how it can be...

Question

Question

Someone asks you to explain what contribution margin per unit is and how it can be used in profit planning. What will you tell them?

Answer 1

Answer #1

There are costs incurred in every business. Some of them are fixed while others vary with the volume of production or sales.

Costs varying with volume are known as variable costs

Contribution margin per unit = Selling Price per unit - Variable costs per unit

Contribution Margin is an important tool for profit planning as fixed costs in total do not change with the change in volume

and hence, contribution margin is the main indicator of profit

Answer 2

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