How to Calculate Weighted Average Contribution Margin (WACM): Definition, Formula and Examples

Contribution Margin Definition

Before we look at the weighted average version, let’s quickly remind ourselves of the concept of contribution margin.

 

The contribution margin is the difference between a product’s selling price and its variable costs.

 

In other words, it’s the portion of revenue that contributes to covering fixed costs and generating profit.

Contribution Margin

Contribution Margin Formula

The formula for contribution margin per unit is:

Contribution Margin per Unit = Selling Price per Unit − Variable Cost per Unit

It can be expressed as a percentage, this is called the contribution margin ratio:

Contribution Margin Ratio = [Contribution Margin per Unit / Selling Price per Unit] × 100

Weighted Average Contribution (WACM) Margin Definition

The Weighted Average Contribution Margin (WACM) shows the average amount that multiple products or services contributes toward covering fixed costs.

 

It is useful for businesses that sell numerous products with different prices, costs and sales volumes.

 

Each product has its own contribution margin, and since these margins vary, the WACM adjusts for the proportion of total sales for each product.

 

This provides a clearer picture of how the overall product mix contributes to covering fixed costs.

 

For example, imagine a business that sells both high margin premium products and low margin budget products.

 

While the premium products contribute more per unit, they may represent a smaller portion of total sales.

 

On the other hand, the budget products sell higher volumes, but contribute less per unit.

 

The WACM accounts for both the contribution per unit and the sales volume of each product, providing a more accurate view of the business’s overall ability to cover fixed costs.

Weighted Average Contribution Margin

Weighted Average Contribution Margin Formula

The formula to calculate the weight average contribution margin is:

Weighted Average Contribution Margin Per Unit = ∑(Contribution Margin per Unit × Sales Mix Percentage)​

Where:

 

  • ∑ = “sum of”
  • Contribution Margin per Unit = Selling Price per Unit − Variable Cost per Unit
  • Sales Mix Percentage = [Units Sold of Product / Total Units Sold] × 100

 

It can be expressed as a percentage, this is called the weighted average contribution margin ratio:

Weighted Average Contribution Margin Ratio = [WACM per Unit / Weighted Average Selling Price] × 100

Weighted Average Contribution Margin Example

Let’s now run through a step-by-step example showing exactly how to calculate the weighted average contribution margin in a real world scenario.

 

Imagine a business that sells three different products, using the data below:

Product

Selling Price

Variable Cost

Sales in Period

A

£50

£30

1,000 units

B

£80

£40

500 units

C

£30

£20

2,000 units

Step 1: Calculate the Contribution Margin for Each Product

The first step is to calculate the contribution margin for each individual product using the following formula:

 

Contribution Margin per Unit = Selling Price per Unit − Variable Cost per Unit

 

  • Product A = £50 – £30 = £20
  • Product B = £80 – £40 = £40
  • Product A = £30 – £20 = £10

Step 2: Calculate the Sales Mix Percentage for Each Product

The sales mix is the proportion of each product sold, relative to its total sales.

 

To calculate it, we need the total sales (in units) for each product and the overall total sales.

 

The total sales in units would be:

 

1,000 + 500 + 2,000 = 3,500 units

 

Now we can calculate the sales mix percentage for each product using the following formula:

 

Sales Mix Percentage = [Units Sold of Product / Total Units Sold] × 100

 

  • Product A = [1,000/3,500] × 100 = 28.57%
  • Product B = [500/3,500] × 100 = 14.29%
  • Product C = [2,000/3,500] × 100 = 57.14%

Step 3: Multiply the Contribution Margin of Each Product by its Sales Mix Percentage

The next step is to multiply each product’s contribution margin per unit by its sales mix percentage.

 

This will give us the weighted contribution margin for each product.

 

  • Product A = 20 × 28.57% = 5.71
  • Product B = 40 × 14.29% = 5.72
  • Product C = 10 × 57.14% = 5.71

Step 4: Add the Weighted Contribution Margins Together

Now, we simply add the weighted contribution margins together to get the Weighted Average Contribution Margin (WACM):

 

5.71 + 5.72 + 5.71 = 17.14

 

Therefore, the Weighted Average Contribution Margin per Unit is £17.14.

Step 5: (Optional) Calculate the Weighted Average Contribution Margin Ratio

If we want to show the WACM as a percentage, we can calculate the Weighted Average Contribution Margin Ratio.

 

To do this, we first need to work out the weighted average selling price of the products by multiplying each product’s selling price by its sales mix percentage and then summing the results:

 

  • Product A = 50 × 28.57% = 14.29
  • Product B = 80 × 14.29% = 11.43
  • Product C = 30 × 57.14% = 17.14

 

Adding these together gives the weighted average selling price:

 

14.29 + 11.43 + 17.14 = 42.86

 

Now we can calculate the Weighted Average Contribution Margin Ratio using the following formula:

 

Weighted Average Contribution Margin Ratio = [WACM per Unit / Weighted Average Selling Price] × 100

 

Weighted Average Contribution Margin Ratio = [17.14 / 42.86] × 100 = 40%

 

Therefore, the Weighted Average Contribution Margin Ratio is 40%.

Interpreting the Results

We’ve calculated the weighted average contribution margin and the weighted average contribution margin ratio, but what do the results actually mean?

 

The weighted average contribution margin of £17.14 means that, on average, each product contributes £17.14 toward covering the fixed costs and generating profit, after covering variable costs.

 

The weighted average contribution margin ratio of 40% indicates that 40p of every £1 earned from sales goes toward covering fixed costs and profit, after covering variable costs.