Contribution margin is a business’ sales revenue less its variable costs (Corporate Finance
Institute, 2021). The resulting value is used to cover fixed costs and the excess is considered
earnings or income. Variable costs are costs that vary with the number of units produced. The
variable costs are comprised of manufacturing costs (product costs) and some nonmanufacturing
costs (period costs) like selling and administrative costs.
Contribution margin can be calculated for total data, per unit data, or ratios. The variables
involved and the calculation steps are presented below. Unilever nigeria, Plc. sells Lifebuoy
Total Soap 90g (Pack of 12) for $30 and assuming production cost is $8 per pack and the selling
and administrative cost is $4 per pack. Thus, the variable costs are $12 per pack. Unilever's
contribution margin is $18 ($30-$12) per pack. Below I have presented contribution margin
information, assuming 100,000 units are produced and sold per month and come with a fixed
cost of 200,000.
Per Unit Total Ratio
Sales 30 3,000,000 100%
Variable Cost 12 1,200,000 40%
Contribution Margin 18 1,800,000 60%
Fixed Cost 200,000
Net Income 1,600,000
Based on the above analysis, we can see that Unilever can make a net income of $1.6 million if
they sold 100,000 units. We can also do breakeven analysis and find that they need to sell around
11,111 units. This means if they sold 11,111 units the total cost will be equal to total sales.
Another important point is contribution margin percent which is the contribution margin
expressed as a percentage of sales. It is calculated by dividing the sales by the contribution
margin and expressing the result in percentage. The higher the contribution margin the more
scalable the business becomes. This means as the company produces more units the profitability
of the company increases.
Unilever follows a cost-driven structure which means it strives to keep prices as low as possible.
Various innovative ways are used to bring the price down from raw material sourcing to
Institute, 2021). The resulting value is used to cover fixed costs and the excess is considered
earnings or income. Variable costs are costs that vary with the number of units produced. The
variable costs are comprised of manufacturing costs (product costs) and some nonmanufacturing
costs (period costs) like selling and administrative costs.
Contribution margin can be calculated for total data, per unit data, or ratios. The variables
involved and the calculation steps are presented below. Unilever nigeria, Plc. sells Lifebuoy
Total Soap 90g (Pack of 12) for $30 and assuming production cost is $8 per pack and the selling
and administrative cost is $4 per pack. Thus, the variable costs are $12 per pack. Unilever's
contribution margin is $18 ($30-$12) per pack. Below I have presented contribution margin
information, assuming 100,000 units are produced and sold per month and come with a fixed
cost of 200,000.
Per Unit Total Ratio
Sales 30 3,000,000 100%
Variable Cost 12 1,200,000 40%
Contribution Margin 18 1,800,000 60%
Fixed Cost 200,000
Net Income 1,600,000
Based on the above analysis, we can see that Unilever can make a net income of $1.6 million if
they sold 100,000 units. We can also do breakeven analysis and find that they need to sell around
11,111 units. This means if they sold 11,111 units the total cost will be equal to total sales.
Another important point is contribution margin percent which is the contribution margin
expressed as a percentage of sales. It is calculated by dividing the sales by the contribution
margin and expressing the result in percentage. The higher the contribution margin the more
scalable the business becomes. This means as the company produces more units the profitability
of the company increases.
Unilever follows a cost-driven structure which means it strives to keep prices as low as possible.
Various innovative ways are used to bring the price down from raw material sourcing to
