 In this presentation, we will discuss the Contribution Margin, Contribution Margin per unit and the Contribution Margin ratio. We're going to start off with the Contribution Margin. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Margin per unit. These are going to be similar concepts. They're very related, but they can get a little bit confusing to consider what the Contribution Margin is, what the Contribution Margin per unit is, and what the Contribution Margin ratio is. They're all related. They're all similar in some ways. We'll start with a per unit because that's going to be what it is in its basic building block type format. So the Contribution Margin per unit is the amount by which a product's unit selling price exceeds its total variable cost per unit. So once again, we're considering on a per unit basis here what we have in terms of the selling price. And then that will be compared to that's going to be what's coming in what we're getting as compared to the variable cost per unit. And that's what's going to be going out. So obviously, if we think about this per unit, if we're selling things like a coffee mug, we're saying what's going to be the selling price for that particular coffee mug, that one piece of inventory that we sell. And then what's going to be the variable costs, not the fixed costs. We're not talking about normal kind of financial accounting terms, we're saying everything that goes into the production of the inventory. We're not talking, in other words, of the cost of goods sold of that inventory unit, only the variable costs, the variable portion, because those act in a similar fashion. So remember what we're doing here within managerial accounting is we're always breaking things out by the behavior of the cost. And you might be saying, well, that's going to be an inaccurate number because if you think about financial accounting, you're going to be saying, hey, what I'm really gaining from the sale of that should be including everything in this cost. To give me basically the gross profit of the sale per unit. In other words, variable costs shouldn't be it because it's not going to be included everything. And you might say it's not including things like overhead, which are oftentimes the fixed portion that is still necessary to apply to the production. However, we'll see that the contribution margin, just basically the sales price over the variable component will be a very useful calculation when we think about managerial accounting and types of decision making related to it. Also note that we've also seen this contribution margin, not contribution margin per unit, but contribution margin when we looked at the contribution margin income statement, which was the total revenue or total sales minus the total variable costs. You'll see, this is going to be in essence the building block that will get us to that point. We'll be able to take the contribution margin income statement, in other words, and break it down to its components with the use of the contribution margin per unit with the use of the number of units that we sell. And we'll be able to go the other way as well. We'll be able to take the contribution margin per unit, look at how many units we're going to sell and be able to make predictions of a future contribution margin income. statement or projected contribution margin income statement. That's the power. That's the use of a calculation such as this. When we think about the contribution margin, then again, we're thinking about the contribution margin and the contribution margin per unit. First, we'll think about the contribution margin, which is going to be the sales. We're talking total sales now, not per unit. And then we're going to have the variable costs, total variable costs. As we saw on the contribution margin income statement, if we take sales minus the variable costs, that gives us the contribution margin. Now, note when you see the contribution margin and when you work with it in something like a spreadsheet or a spreadsheet program, you're often going to see it in this format because you want to calculate the contribution margin and then think about, well, what's it going to be the contribution margin per unit? And so, or we might see it the other way around. We've got the units and then we'll see the contribution margin. But in any case, notice that when we see this line item here, it's going to say contribution margin or contribution margin per unit because it's representing this two lines. So in other words, if you make a financial statement, the first line is going to have to be one of the other contribution margin per unit or contribution margin. And then the other line is going to have to be contribution margin per unit or contribution margin. So that's why these terms, they can get a little bit confusing when you try to format your spreadsheets and how you're going to be putting this together. So just be aware of that. Now we're talking about the contribution margin per unit over here. We're going to say that the sales are going to be $57 per unit. That would be given. We would know that because we would know how much we sell in our case, the coffee mugs for. And then we have the variable costs of $30. And again, we would know what the variable costs are because we broke that up in our CVP analysis. We know the variable components of our costs. And if we subtract those two out, the 57 minus the 30 gives us the 27. So we have the contribution margin in total. We have the contribution margin per unit. Now we need to consider what the contribution margin ratio is. So now another word with a contribution margin in it, such as note, they're all similar, they're all related. However, they're slightly different. So you want to make sure are we talking the contribution margin? Are we talking the contribution margin per unit? Or are we talking the contribution margin ratio? Here, contribution margin ratio is percent of units selling price that exceeds total unit variable cost. Once again, percent of units selling price that exceeds total variable costs. How would we calculate that? We're going to take the contribution margin per unit and we're going to divide that by the selling price. So remember that. So now we got the contribution margin per unit. What was that? We just looked at it. Contribution margin per unit is the selling price minus the variable costs per unit. So the selling price per unit minus the variable costs per unit. That is the contribution margin per unit. You're going to take that and divide it by the selling price to get the contribution margin ratio. Now, when you consider this, you're probably going to have a similar table like this, and you're always going to be building these tables and you might as well just build them all out, especially if you're using Excel. So you get an idea of setting these tables up, how to calculate these, what the relationships are between them. So we had last time, we had the contribution margin where we have the sales, the variable cost, the contribution margin in total. We also have it in units. So if we have the units over here, then we could look at our formula and we could say divide that out. We get 0.47 in a decimal format or 70, 47%. In other words, you're going to see your table here. We're going to say, all right, now we see what the contribution margin is, which was the sales minus the variable cost contribution margin per unit 27. So we'll take that 27 and we'll divide it by the sales, which is 57 divided by 57. And that's going to give us it's not exact, but 0.47. So we've rounded here. So be aware this is rounded. And then if we move the decimal two places to the right, we're going to get that 47%. Now note that we always concentrate on the contribution margin most of the time. But what we're really doing here is a similar kind of racial analysis that we would see on an income statement. This is similar to what we'd see in an income statement, which would be income minus cost of goods sold. This is going to be a similar to a contribution margin income statement type of calculation where we have sales minus the variable costs to get to the contribution margin. So just note that we're comparing everything to sales. So we compared the 27 to the sales, we can do the same for the 30. So if I compared 30 variable costs per unit to the sales divided by sales, we get 52.6 or about 53. And again, if I move the decimal over 53 and of course 47 and 53 is going to add up to one or 100% or sales over sales 57 divided by five or let's say 57 divided by 57. Okay, so also note that we could do the same thing here. We did this on a per unit basis. That's what our definition said. But of course we could do the same thing with the relationship between the total sales and variable costs, if of course the ratio is the same. In other words, every unit was sold for 57 and the variable costs were all 30, then the relationships will be the same. So we can if we have our contribution margin here in total dollar numbers, we can then take and let's keep this down here. We can take the 2679 divided by the sales 5700, which is going to give us the same number of course as the 27 about this is rounded over the 57. And so we get the 47 again, be careful of rounding same kind of situation. And then if we take the variable costs, the 3021 divided by the 5700 that gives us the 53. And if we add those two up, we get the 100% again given for rounding 57 over 57 as well will give us the 100%. So you're always going to be wanting to build out these types of tables that you'll have and this will be similar to a contribution margin type of income statement. Just again, be be aware that you're going to be considering total costs per unit costs. And when you think about these line items, then you're going to have to consider whether you're talking about which column you're having here to represent total costs and the per unit costs and the contribution margin percentage. It's not going to it might not be as clear given the description because it's they're all going to be on the same line. You'll have to go to the headers up here to know exactly what you're talking about. You want to keep them distinct in your mind. The best way to do that is to calculate them all. Most of the time when you have these types of problems, you just do all the calculations and try to rework them and calculate them in different ways. So you get just a good idea of all the relationships that go on between these, how they're similar, how they relate to each other, their similarities and the ratios between the per units and the totals.