The contribution margin can be expressed on a gross or per-unit premise.

It speaks to the
steady cash created for every item/unit sold while deducting the variable bit of the
organizational expenses.

The contribution margin is defined as the selling cost per unit less the variable expense per
unit. It gives one approach to show the benefit capability of a specific item offered by
an organization and shows the segment of deals that assists with taking care of the
organization's fixed expenses. Any outstanding income left in the while taking care of fixed
expenses is the benefit produced.

The main formula for contribution margin =

Contribution Margin = Sales Revenue – Variable Costs

The contribution margin ratio shows the available money to make up the fixed costs.

The Contribution Margin Ratio =

Sales Revenue−Variable Costs

Sales Revenue

Sales Revenue = The income received by the organization by selling the

goods or its services.

Variable Costs = The costs that changes when the quantity of goods or
services when changing its production quantity.

The company I chose for t my previous discussion was Apple.inc. For the company, the fixed
costs are Display screen - 66$, Battery - 10$, Digital camera - 74$, Processor and Memory -
60$, Sensor, other - 180$, and a labor charge of 7.25$ per hour in the US. Consider 8$ of
labor cost towards making one iPhone, then a 2$ goes for the electricity charges to make one
iPhone. There are also some types of machinery used to assemble and install the phone.
Consider it as 10,000$.

So to make one IPhone the total variable cost required is (75+66+10+60+180+8+2) = 401$.
If 100 units are manufactures, the total variable cost will be (401*100) = 40100$. These type
of variable costs increases with an increased number of products producing. The cost of the
machines to produce one iPhone does not change with the number of units produces it will
remain the same called fixed costs.

Hence the amount required to produce 100 IPhones is 41000+10000 = 51000$

The per unit price = 51000/100 = 510$

If the company sell an IPhone for 999$ then the profit per unit = 999 – 510 = 489$

But the contribution margin only consider the Variable costs

Contribution Margin = Sale Price – Total Variable Price
= 999 – 401 = 598$
Contribution Margin Percentage = (999-401)/999 = 59.8 %
To conclude, from all these hypothetical data we can see that, as the production increases the
profit margin is also increasing. This data will provide an estimated profit return from the
products. And this will also help to find out whether the company will face profit loss or is it
profitable.

References

1. Maverick, J. (2020, August 28). The Difference Between Gross Profit Margin and Net
Profit Margin. Retrieved September 22, 2020, from
https://www.investopedia.com/ask/answers/021215/what-difference-between-gross-
profit-margin-and-net-profit-margin.asp

2. Brown, R. (2020, August 29). The Cost of Making an iPhone. Retrieved September
15, 2020, from https://www.investopedia.com/financial-edge/0912/the-cost-of-
making-an-iphone.aspx

3. Staff, I. (2020, September 16). Understanding Contribution Margins. Retrieved

September 22, 2020, from
https://www.investopedia.com/terms/c/contributionmargin.asp