What Happens to the Contribution Margin When the Unit Selling Prices Increase?

Variable Costs

Variable costs have an inverse relationship with contribution margin. The higher the variable costs are, the lower the contribution margin. Depending on changes to variable costs, an increase in selling price may or may not increase the contribution margin. If the increase in selling price exceeds the net increase in variable costs, the contribution margin also increases. If variable costs have a larger increase than selling price, the contribution margin can go down.

Unit contribution margin is independent of the number of units sold and has the same general relationship with unit selling price and variable costs per unit. Thus, any change in unit contribution margin is the result of the combined effects of changes in unit selling price and variable costs. However, an increase or decrease in unit contribution margin because of the net increase or decrease in unit selling price does not necessarily lead to the same change in total contribution margin, which also depend on units sold.

While units sold have no direct effect on unit contribution margin, they can be affected by changes in unit selling price and variable costs per unit. By raising or lowering unit selling price, companies can influence their sales volume by making their products seemingly too expensive or relatively affordable for customers to buy. Companies may also make price adjustments based on changes in product costs. Any change in the number of units sold further affects the total contribution margin.

Total contribution margin is the unit contribution margin multiplied by the total number of units sold. Units sold is relevant in determining what happens to the total contribution margin when the unit selling price increases. Total contribution margin can decrease even when the unit selling price increases if the price increase has led to a substantial loss in sales volume. On the other hand, total contribution margin can increase even when unit selling price decreases if the price decrease has led to substantial gain in sales volume.