How to Determine the Average Contribution Margin per Hour
Contribution margin is defined as sales revenue less any variable expenses. It is typically calculated for a one-year period. Contribution margin is the money that you use to pay fixed expenses, such as salaries, rent, insurance and other costs that remain the same month in and month out. If the total contribution margin is insufficient to cover your fixed expenses, your business is considered to have suffered a loss. You can determine the average contribution margin per hour by individual, by department or for the entire company.
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1.
Get the total sales figure for the year from your bookkeeper, accountant or bookkeeping software. For the example, assume a department generates sales for the year of $300,000.
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2.
Acquire the department's variable costs for the year from your bookkeeper, accountant or bookkeeping software. Variable costs are those that increase or decrease according to output. Examples include sales commissions, raw materials, shipping costs and wages of temporary employees. Variable costs in this example are $180,000.
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3.
Total the work hours of the department employees for the year. Get work hour information from accounting or human resources. In this example, work hours for the department equal 6000.
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4.
Subtract variable costs from the sales figure. Continuing with the example, $300,000 minus $180,000 equals $120,000. This is your department's yearly contribution margin.
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5.
Divide the yearly contribution margin by the number of work hours. In this case, $120,000 divided by 6000 equals $20, your department's average contribution margin per hour.
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