How to Calculate Contribution Margin Ratio for Windows and Doors?
- Contribution Margin per Unit Calculation:
- CM window = $300 - $175 = $125
- CM door = $700 - $450 = $250
- Contribution Margin Ratio Calculation:
- CMR window = ($125 / $300) * 100 = 41.67%
- CMR door = ($250 / $700) * 100 = 35.71%
Understanding Contribution Margin Ratio for Windows and Doors
Contribution Margin per Unit Calculation: The contribution margin per unit is a crucial financial metric that helps businesses analyze the profitability of their products. At Handy Home, the contribution margin per unit for windows is $125, calculated by subtracting the variable cost per unit ($175) from the selling price per unit ($300). Similarly, for doors, the contribution margin per unit is $250, determined by deducting the variable cost per unit ($450) from the selling price per unit ($700).
Contribution Margin Ratio Calculation: The contribution margin ratio is calculated to understand what percentage of sales revenue is available to cover fixed costs. In this case, the contribution margin ratio for windows at Handy Home is 41.67%, while for doors, it is 35.71%. This means that for every dollar of sales revenue generated from windows, 41.67 cents contribute towards covering fixed costs, and for doors, 35.71 cents contribute towards the same.
By analyzing the contribution margin ratio for both products, Handy Home can make informed decisions about pricing strategies, product mix, and overall profitability. Since windows have a higher contribution margin ratio compared to doors, the company can focus on increasing sales of windows to maximize their contribution towards fixed costs.