The contribution margin of a manufacturer is the amount of net sales that is in excess of the variable manufacturing costs and the variable SG&A expenses. To illustrate, let's assume that a manufacturer has a single product and 80,000 units were produced and sold during a recent year. The selling price was $10 per unit, variable manufacturing costs were $3 per unit, and variable SG&A expenses were $1 per unit. The company's fixed manufacturing costs were $300,000 and its fixed SG&A expenses were $90,000. The company's contribution margin was $480,000 ($800,000 - $240,000 - $80,000). The contribution margin per unit was $6 ($10 - $3 - $1). The contribution margin ratio was 60% ($6/$10 or $480,000/$800,000).
The contribution margin is also a key component in computing a company's break-even point.
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