How to Calculate Contribution Margin for Custom Cabinets Business
Calculation of Contribution Margin
In order to calculate the contribution margin for a business making custom cabinets, we need to consider the various costs involved in the production process.
Selling Price: The selling price of each cabinet is $80.
Variable Costs: Variable costs include raw materials and direct labor.
Raw Materials: Each cabinet uses $25 in raw materials.
Direct Labor: It takes a cabinetmaker approximately 45 minutes to make one cabinet, which is equivalent to $13.50 of labor cost based on an hourly rate of $18.
Calculation:
Contribution = Selling Price/ unit - Variable Costs/ Unit
Contribution = $80.00 - ($25.00 + $13.50)
Contribution = $41.50
Contribution Margin:
Contribution Margin = Contribution/Selling Price à 100
Contribution Margin = $41.50/$80.00 Ã 100
Contribution Margin = 51.875%
Therefore, the contribution margin for the custom cabinets business is 51.875%.