Weighted Average Unit Contribution Margin

The unit contribution margin for a product is the difference between the selling price and the cost price. So for example, if a business sells only one product with a selling price of 20.00 and a cost of 7.00, then the unit contribution margin for the product and the business is 20.00 – 7.00 = 13.00.

The problem becomes more complicated when a business sells multiple products. Each product will have a different contribution margin, and therefore to establish the overall unit contribution margin for the business, the contribution from each product must be weighted in proportion to the number of units of that product sold (sometimes referred to as the unit sales mix). The resultant unit contribution is known as the weighted average unit contribution margin.

Suppose, for example, that a business sells five products with contribution margins and unit sales mix percentages as follows:

Multiple products margin and unit sales mix
Product Margin Mix %
A 2.46 20%
B 5.90 19%
C 12.00 26%
D 18.90 14%
E 22.00 21%

While the individual contribution margins of each product are known, the overall unit contribution margin of the business needs to be calculated using the weighted average contribution margin per unit formula.

Weighted Average Unit Contribution Margin Formula

The weighted average unit contribution margin formula takes each products unit contribution, and weights it in proportion to its unit sales mix percentage as follows:

Weighted average unit contribution margin = Contribution A x Sales mix % A + Contribution B x Sales mix % B + ... Contribution E x Sales mix % E
Weighted average unit contribution margin = 2.46 x 20% + 5.90 x 19% + 12.00 x 26% + 18.90 x 14% + 22.00 x 21%
Weighted average unit contribution margin = 12.00

Providing the unit sales mix percentages remain constant, for every product sold by this business, on average it will receive a unit contribution margin of 12.00.

Using the Weighted Average Unit Contribution Margin

The most important use for the weighted average unit contribution margin is in the calculation of the break even point for a multiple product business.

The break even formula is as follows:

Break even units = Operating expenses / Contribution margin per unit

For a multiple product business, the weighted average unit contribution margin is simply substituted into the formula. For our example above, if the fixed operating expenses were 96,000, then the break even units is given as follows:

Break even units = Operating expenses / Weighted average unit contribution margin
Break even units = 96,000 / 12.00
Break even units = 8,000

The business needs to sell 8,000 units to break even. For this calculation to work, the unit sales mix percentages must remain constant, and the units must be sold in the correct proportions as follows:

Allocation of break even units
Product Mix % Units
A 20% 1,600
B 19% 1,520
C 26% 2,080
D 14% 1,120
E 21% 1,680
Total 100% 8,000

The total contribution margin from these products is as follows:

Contribution = 2.46 x 1,600 + 5.90 x 1,520 + 12.00 x 2,080 + 18.90 x 1,120 + 22.00 x 1,680 Contribution = 95,992 rounded to 96,000

As the operating expenses were also 96,000 the business will break even at this level of unit sales for each of the five products.

Weighted Average Unit Contribution Margin November 6th, 2016Team

You May Also Like

Related pages

salvage value in npvwhat is unearned revenue on a balance sheetjournal entry of bills receivabledebtor collection days ratiodefinition of trade payablescost of good sold formula accountingexample of bookkeeping recordsimportance of horizontal analysiscash book reconciliation exampleis petty cash an assetnpv calculator excelhow to prepare a contribution format income statementwhat is bills receivable in accountingannuity due calculatorprovision for bad and doubtful debts entrydefine sundries expensefob shipment meansadjusting journal entry for depreciationcredit voucher templatepresent value of an annuity in excelpresent value of an annuity tablesample excel spreadsheet for accountingformula of debtors turnover ratiointangible assets balance sheet exampleallowance for inventory obsolescencepresent value chart $1excel formulas for accounting pdfcalculation of gearing ratiostep in accounting cyclelabor usage variancecontribution to sales ratioprintable ledger sheetsaccounts receivable ledger exampleperpetuity modelmargin calculator excelmarkup v margin calculatorimprest system meaningnonprofit chart of accounts examplepresent value factor of annuityadjusting entries affect the cash accountfuture value annuity factor formulapurchase return and allowanceshow to find inventory turnover ratiobeginning finished goods inventorymarkup equationpetty cash claim formprovision for annual leave journal entryconsumable assetswrite off of intangible assetscapital expenditure accounting entryaccounting ledger book formatlifo calculation exampleadjusting entry for supplies usedaccounting equation transactions worksheettrial balance example ukcontribution margin and fixed costsgeneral ledger spreadsheetwhat is profit markupaccounting journal entry cheat sheetinterest rate calculation in excelfuture value of annuity equationformat of sales ledger control accountdiscount percentage formula excelaging of accounts payableis accounts receivable a credit or debitwhat does fob origin meanchart of accounts for merchandising businessjournal entry for advance paymentwhat is retained earningpetty cash register templatehow to find variable cost formulaformula for present value of annuityageing of accounts receivablelifo vs fifo accountingdebtors control account exampletotal contribution margin at the break even pointprovision accounting entriescallable preference shares