How to Calculate Contribution Margin for Custom Cabinets Business

Calculation of Contribution Margin

In order to calculate the contribution margin for a business making custom cabinets, we need to consider the various costs involved in the production process.

Selling Price: The selling price of each cabinet is $80.

Variable Costs: Variable costs include raw materials and direct labor.

Raw Materials: Each cabinet uses $25 in raw materials.

Direct Labor: It takes a cabinetmaker approximately 45 minutes to make one cabinet, which is equivalent to $13.50 of labor cost based on an hourly rate of $18.

Calculation:

Contribution = Selling Price/ unit - Variable Costs/ Unit

Contribution = $80.00 - ($25.00 + $13.50)

Contribution = $41.50

Contribution Margin:

Contribution Margin = Contribution/Selling Price × 100

Contribution Margin = $41.50/$80.00 × 100

Contribution Margin = 51.875%

Therefore, the contribution margin for the custom cabinets business is 51.875%.