Weighted Average Contribution Margin

Weighted Average Contribution Margin

The average amount that each unit of product contributes to a company over the cost of producing it, after accounting for the different price of different products. For example, suppose half a company's sales come from Product A and half come from Product B. If the sale of each unit of Product A results in a $5 profit, and the sale of each unit of Product B results in $15, the weighted average contribution margin is $10.
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This assumption allows us to use a weighted average contribution margin to analyze the effect of various situations on our profits.
Using the weighted average contribution margin lets us get a feel for what caused the Contribution Margin Volume Variance because breaking the total variance into two smaller variances gives us a better picture of what happened during the period.
When we calculated the Sales Volume Variance, we multiplied both unit variances by the weighted average contribution margin. This time, however, we multiplied each unit variance by the budgeted contribution margin of that unit.
If we multiply that number by the weighted average contribution margin, we get Bob's Market Size Variance, our estimate of how much the change in the overall market size should have changed Bob's net income.
Market share = Actual market size x (Actual market share - Budgeted market share) x Budgeted weighted average contribution margin per unit
Market size = (Actual market size-Budgeted market size) x Budgeted market share x Budgeted weighted average contribution margin per unit
The weighted average contribution margin is determined by multiplying the product's contribution margin by its sales mix.
Total weighted average contribution margin = $121.10 Breakeven point = Total fixed costs/weighted avg.
Table 6 Prod1 Prod2 Prod3 Selling price $175.00 $225.00 $250.00 Direct material 40.00 50.00 60.00 Volume costs 47.93 56.09 83.37 Total volume costs $87.93 $106.09 $143.37 Contribution margin $87.07 $118.91 $106.63 Weighted average cont mgn $47.89 $42.81 $9.60 Total weighted average contribution margin $100.30 Table 7 Cost Amount Production scheduling $150,000 Setup time 180,000 Inspection 210,000 Shipping 140,000 Common - mfg 100,000 Common - mkt/admin 75,000 Total $855,000 Breakeven point $855000/$100.30 = 8525 units
To calculate the breakeven point, we first need to calculate the weighted average contribution margin, which is the contribution margin for each type of unit we sell times that unit's percentage of total unit sales.
Once you have the weighted average contribution margin, the breakeven point is an easy calculation: simply divide total fixed costs ($793,260 for Bob's) by the weighted average contribution margin.
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