All businesses want to make a profit. It's vital, therefore, for management to understand how the company is making a profit--or why it is not. A per-unit analysis of gross profit margin and contribution margin can provide crucial information about which products and product lines are making the most money for the business, and which are performing poorly. Oversee these margins in advance and managers can be prepared for a happy return at the end of the year.
Gross Profit Margin Per Unit
Determine how many units you sold during the analysis period. If you are planning in advance, use your planned sales, or simply the number one.
Divide the total sales revenue for all units by the number of units sold to get revenue per unit. If you are calculating projections based on one unit, this is your average retail price. Don't forget to factor discounts and damages into your projections: if you believe you'll discount and write off 10 percent of your retail price on average, deduct this from your projected revenue per unit.
Add up the costs of producing these units. If you purchased this item wholesale and resold it, this cost is your purchase price. If you manufactured the unit, it is the cost of supplies, labor and resources that went into its production. Only include items that directly relate to unit manufacture -- if your employee makes 10 widgets per hour and gets paid $15 for that hour, the direct labor cost per widget is $1.50.
Divide your costs by the number of units they represent to get cost per unit.
Subtract your production cost per unit from your revenue per unit for the gross profit margin per unit. Divide this number by your revenue to express your profit margin as a percentage of revenue.
Contribution Margin per Unit
Calculate your revenue per unit as described in Steps 1 and 2 of Section 1.
Identify all costs related to selling each unit. This includes marketing, advertising and salesperson salaries. Total the sum them and divide by the number of units to get selling cost per unit.
Add your selling costs per unit to the production cost per unit as calculated in Section 1 to determine your total cost per unit.
Subtract your total cost per unit from your revenue per unit to get your contribution margin. Divide this number by your revenue per unit to express it as a percentage of revenue.
You can use these same methods to evaluate various product or business lines--just group your numbers accordingly.
Don't forget to include volume in your profit analysis -- your highest margins are worth nothing if you're not moving any units.