{"id":23356,"date":"2022-09-08T12:13:24","date_gmt":"2022-09-08T16:13:24","guid":{"rendered":"https:\/\/einvestingforbeginners.com\/?p=23356"},"modified":"2022-09-08T12:13:27","modified_gmt":"2022-09-08T16:13:27","slug":"contribution-margin-and-unit-economics-in-investing-csmit","status":"publish","type":"post","link":"https:\/\/einvestingforbeginners.com\/contribution-margin-and-unit-economics-in-investing-csmit\/","title":{"rendered":"Contribution Margin and Unit Economics in Investing"},"content":{"rendered":"\n
Contribution margin is used in both investing and management accounting to make decisions regarding profitability, project feasibility, and unit economics. Contribution margin measures the incremental income associated with each additional unit of production. Particularly when investing in growth companies, contribution margin and unit economics should be analyzed very closely to understand the scalability of the business.<\/p>\n\n\n\n
This article will explore the concept of contribution margin while also introducing investors to techniques to measure and analyze contribution margin in order to build it into company valuations and forecasts. We will also walk through an example calculating the contribution margin per pint of beer for global brewing giant AB InBev. Readers will be walking away with an understanding (and great bar trivia!<\/em>) that their next pint of beer might be contributing $0.27 to their preferred brand’s income!<\/p>\n\n\n\n Contribution Margin = Price \u2013 Variable Cost<\/em><\/strong><\/p>\n\n\n\n or<\/em><\/p>\n\n\n\n Contribution Margin per Unit = Price per Unit\u2013 Variable Costs per unit<\/em><\/strong><\/p>\n\n\n\n or<\/em><\/p>\n\n\n\n Contribution Margin per Unit = \u2206 Revenue – \u2206 Variable Costs \/ \u2206 # Units<\/strong><\/p>\n\n\n\n As can be seen in the equation, the incremental contribution margin is taking variable revenue less variable costs. The word \u201ccontribution\u201d signifies that we are talking about the incremental income not being consumed by variable unit costs that are \u201ccontributing\u201d to covering the fixed costs of the business or project. In our simplified example graphed below, the unit price is $5 and variable costs are $3 per unit. This means that with sales of 10,000 units, revenues will be $50,000 and total variable costs will be $30,000, yielding a net contribution margin of $20,000.<\/p>\n\n\n