What Is a Unit Margin?
Financial statement analysis can provide significant insights into how well a business is run. A review of the actual numbers shown provides information that can suggest changes. However, department managers often need more detailed information at the operational level to make good, informed decisions. Information about per unit sales and expenses, including unit margin, provides information to production, marketing and purchasing functions.
Unit margin, also called unit contribution margin, reflects the cost incurred to produce and sell a particular unit of product. It is the profit achieved per unit after deducting product manufacturing or packaging costs and variable selling expenses from the product's sales price. The unit contribution margin is what remains after subtracting all variable costs specifically assigned to a single unit of sale, whether product or service, from the products’ associated revenues. In simple terms, unit margin is unit price less the unit cost.
Unit margin is one of the key variables at the production and sales level that aids in decision-making profit model analysis. Unit margin only shows gross profit before the inclusion of any fixed operating or overhead expenses and before including interest, depreciation and income tax expenses. Therefore, analysis of the unit margin helps guide the product's pricing. It can show if there is room to reduce the price or increase the product's marketing budget. If your company is competing on price, unit margin can aid in the identification of options for reducing production or promotional costs.
Unit margin analysis is often done as a part of a cost accounting process. Cost accounting considers money as a factor of production. Financial accounting considers money as a measure of performance. With cost accounting, companies record the costs and inputs into carrying out various activities including production and sales. Cost accounting divides these costs and inputs into variable and fixed expenses. This helps companies determine sales price ranges, identify potential cost savings and better allocate resources.
The variable costs assigned to a unit may vary widely, depending on the company or industry. Most unit margins include only direct material costs and any supplies used to produce the product. You typically would only include labor costs if you were paying them under a per piece or per service rate plan. For example, a drain company that sends out plumbers paid by the hour would include the plumber's cost in the calculation of its drain services. A plumbing company offering a wide range of services that has plumbers on salary would exclude the plumber's cost.