How To Calculate Weighted Average Contribution Margin?
How To Calculate Weighted Average Contribution Margin?
To calculate the Weighted Average Contribution Margin (WACM), you combine the contribution margins of multiple products or services, weighted by their sales mix.
The formula to calculate WAACM is:
WACM= ∑ (Contribution Margin per Unit x Sales Mix)/ Total Sales Mix
Where;
- Contribution Margin per Unit = Selling Price per Unit−Variable Cost per Unit
- Sales Mix = The proportion of each product’s sales to total sales.
The Weighted Average Contribution Margin (WACM) measures the average amount that a mix of products or services contributes toward covering a business’s fixed costs. This metric is particularly valuable for businesses that sell multiple products with different price points, costs, and sales volumes.
Since each product has its own contribution margin, the WACM accounts for the proportion of total sales for each product, offering a more accurate picture of how the entire product mix contributes to fixed costs.
For example, a company might sell high-margin premium products alongside low-margin budget products. While the premium items generate more profit per unit, they may account for only a small percentage of overall sales. Meanwhile, budget-friendly products may sell in higher volumes but contribute less per unit.
The WACM balances these differences, helping businesses understand their true profitability and make better pricing and sales strategy decisions.
It’s like calculating your class grade when each subject has a different weight.
