How to Calculate Price Based on Margin

Calculating price based on contribution margin.

In the world of micro-economics, the contribution margin measures the profitability of individual products. It is calculated by subtracting the variable cost of the product from the product price and then dividing the difference by product price. If you know what the contribution margin is for a particular product, you can also work backwards to calculate the price of the product based on margin.

Things You'll Need

• Calculator or spreadsheet

Instructions

1. Determine the contribution margin. This is a given. Let's say the margin is 20 percent.

2. Determine the variable cost of producing the product. Variable costs are those costs which do not change with increased (or decreased) levels of output. Common examples of variable costs are the cost of inventory or materials, direct labor involved in producing the product or service and certain utilities. Let's say variable costs are $20.

3. Calculate the price based on margin. Multiply the variable cost by -1 and divide by the contribution minus 1. That is, the calculation is: -variable cost/(contribution margin-1). For this example the answer is: -$20 / (.20-1) = -$20 / -.8 = $25.

References

• Investopedia: Contribution Margin