Avia Company sells a product for $120 per unit. Variable costs are $50 per unit, and fixed costs are $500 per month. The company expects to sell $660 units in September. The unit contribution margin is

A. $50 per unit

B. $120 per unit

C. $170 per unit

D. $70 per unit

Avia Company

Unit Contribution Margin = $70 per unit

Explanation:

Contribution is the difference between Sales Price and Variable Costs. In this Avia case, selling price is $120 per unit with variable costs of $50 per unit.

So, contribution per unit = 120 - 50 = $70.

Contribution as a managerial accounting measure is determined before the fixed costs are deducted to arrive at income. Contribution as a managerial technique assists in decision making, especially when choices have to be made among alternative courses of action.

The idea behind this measure is that by the nature of fixed costs, they are constant within the relevant range, without reference to the volume of activity. Since they are not variable according to the volume of activity, it would be unwise to consider them when certain incremental or differential decisions are being taken.