The weighted average contribution margin is an amount calculated to determine project profit levels for different amounts of sales. It presents an average amount that a group of services or products pays for the fixed cost of a business.
Explanation:
It is important to have an opportunity to calculate how much a product contributes to the bottom line of a business to increase a revenue. However, the process of calculation can be complicated due to the variety of products that the store sells. Therefore, the company needs to determine how many products it wants to sell and use sales mix, variable costs, and purchase prices for each individual item to identify contribution margins. Once contribution margins are determined, they are averaged to the weighted average contribution margin (WACM), which is the key component of a multi-product calculation.
To calculate WACM, one should collect the most accurate data. It is vital to determine a sale price for each item, along with fixed costs for the business. Also, one should identify variable costs. The sales mix can be expressed as a percentage, and it shows how much each product line contributes to overall sales.
The mix of sales should remain consistent for more accurate WACM results, and that is why it is important to choose data for a more extended period of time.
Once the raw data is collected, one can determine a contribution margin by subtracting variable costs from the sales price. Also, it allows calculating the contribution margin ratio per product line by dividing the contribution margin by the sales price.
A formula for the weighted average contribution margin is the following:
(Aggregate sales – Aggregate variable expenses) ÷ Number of units sold = Weighted average contribution margin.