Contribution Margin Per Machine Hour Calculator
Calculate the contribution margin generated for every hour a machine is used to produce a specific product. This metric helps evaluate the efficiency and profitability of products based on a limited resource (machine hours).
Enter the Selling Price Per Unit, Variable Cost Per Unit, and the Machine Hours required to produce one unit.
Enter Product Data
Understanding Contribution Margin Per Machine Hour
What is Contribution Margin Per Machine Hour?
Contribution Margin Per Machine Hour is a profitability metric used when machine hours are a limiting factor or bottleneck in production. It tells you how much revenue is left after covering variable costs, *for each hour* a machine is utilized to produce a specific product. It's calculated as:
(Selling Price Per Unit - Variable Cost Per Unit) / Machine Hours Per Unit
The difference `(Selling Price Per Unit - Variable Cost Per Unit)` is the standard Contribution Margin Per Unit. Dividing this by the machine hours required gives you the contribution margin *per hour* of machine time.
Why is it Important?
This metric is crucial for decision-making, especially when you have limited machine capacity. It helps in:
- Product Mix Decisions: Prioritizing which products to produce when machine time is scarce. Products with a higher contribution margin per machine hour are generally more profitable per hour of bottleneck time.
- Pricing Strategies: Understanding the true cost and profitability when machine usage is a significant factor.
- Efficiency Analysis: Identifying which products utilize machine time most effectively in generating profit contribution.
Variable vs. Fixed Costs
Remember that Contribution Margin only considers *variable costs* (costs that change directly with production volume, like raw materials, direct labor, sales commissions). *Fixed costs* (like rent, salaries, depreciation - often including machine depreciation or lease costs) are *not* included in the contribution margin calculation. The contribution margin contributes towards covering fixed costs and generating profit.
Contribution Margin Per Machine Hour Examples
See how different scenarios affect the calculation:
Example 1: Standard Product
Scenario: Calculate the CM per machine hour for a product.
1. Known Values: Selling Price Per Unit = $20, Variable Cost Per Unit = $12, Machine Hours Per Unit = 0.5 hours.
2. Calculate CM Per Unit: $20 - $12 = $8.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: $8 / 0.5 hours
5. Result: $16 per machine hour.
Conclusion: This product generates $16 of contribution margin for every hour the machine is used.
Example 2: Product with High Variable Cost
Scenario: A product has high material costs but low machine time.
1. Known Values: Selling Price Per Unit = $50, Variable Cost Per Unit = $40, Machine Hours Per Unit = 0.25 hours.
2. Calculate CM Per Unit: $50 - $40 = $10.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: $10 / 0.25 hours
5. Result: $40 per machine hour.
Conclusion: Despite a low CM per unit ($10), its efficient use of machine time results in a high CM per machine hour ($40).
Example 3: Product with Low Selling Price
Scenario: A low-cost item requires moderate machine time.
1. Known Values: Selling Price Per Unit = $5, Variable Cost Per Unit = $2, Machine Hours Per Unit = 0.1 hours.
2. Calculate CM Per Unit: $5 - $2 = $3.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: $3 / 0.1 hours
5. Result: $30 per machine hour.
Conclusion: A small CM per unit ($3) can yield a reasonable CM per machine hour ($30) if machine time usage is low.
Example 4: Product with High Machine Hours
Scenario: A premium product with a good margin but long machine time.
1. Known Values: Selling Price Per Unit = $100, Variable Cost Per Unit = $60, Machine Hours Per Unit = 2 hours.
2. Calculate CM Per Unit: $100 - $60 = $40.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: $40 / 2 hours
5. Result: $20 per machine hour.
Conclusion: A high CM per unit ($40) might translate to only a moderate CM per machine hour ($20) if it consumes significant machine time.
Example 5: Product Comparison (for Decision)
Scenario: Compare two products when machine hours are limited.
Product A: SP=$30, VC=$15, MH=0.5 hrs. CM Unit = $15. CM/MH = $15 / 0.5 = $30/hour.
Product B: SP=$40, VC=$20, MH=1.0 hrs. CM Unit = $20. CM/MH = $20 / 1.0 = $20/hour.
Conclusion: Although Product B has a higher CM Per Unit ($20 vs $15), Product A generates a higher CM Per Machine Hour ($30 vs $20). If machine time is the bottleneck, Product A is prioritized.
Example 6: Loss Per Unit but Positive CM Per Hour
Scenario: A product seems unprofitable based on net income but contributes well to machine time.
Assume fixed costs related to machine time exist. Selling Price = $10, Variable Cost = $7, Machine Hours = 0.1 hrs. CM Per Unit = $3. CM Per Machine Hour = $3 / 0.1 = $30 per hour.
If machine-related fixed costs are $4 per unit, Net Income per unit = $3 (CM) - $4 (Fixed) = -$1 (Loss). However, the machine earns $30 in contribution for each hour it runs, helping cover total fixed costs. This is simplified, but shows CM/MH focuses on resource contribution.
Conclusion: This product has a positive contribution margin per machine hour ($30), meaning it helps cover fixed costs and is likely better than leaving the machine idle, even if it shows a loss per unit when allocating fixed costs arbitrarily.
Example 7: Simple Numbers
Scenario: Basic calculation.
1. Known Values: Selling Price Per Unit = $10, Variable Cost Per Unit = $5, Machine Hours Per Unit = 1 hour.
2. Calculate CM Per Unit: $10 - $5 = $5.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: $5 / 1 hour
5. Result: $5 per machine hour.
Conclusion: A simple scenario showing the direct calculation.
Example 8: Decimal Inputs
Scenario: Using decimal values for inputs.
1. Known Values: Selling Price Per Unit = $25.50, Variable Cost Per Unit = $10.75, Machine Hours Per Unit = 0.75 hours.
2. Calculate CM Per Unit: $25.50 - $10.75 = $14.75.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: $14.75 / 0.75 hours
5. Result: ≈ $19.67 per machine hour.
Conclusion: The calculation works the same with decimal inputs.
Example 9: Scenario with Zero Machine Hours
Scenario: What happens if Machine Hours Per Unit is zero?
1. Known Values: Selling Price Per Unit = $10, Variable Cost Per Unit = $5, Machine Hours Per Unit = 0 hours.
2. Calculate CM Per Unit: $10 - $5 = $5.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: $5 / 0 hours
5. Result: Error: Division by zero.
Conclusion: The calculator should flag an error because you cannot divide by zero. A product requiring zero machine hours means machine time is not a constraint for this product, and the metric CM Per Machine Hour is not applicable or meaningful in this context.
Example 10: Scenario with Negative CM Per Unit
Scenario: Selling price is less than variable cost.
1. Known Values: Selling Price Per Unit = $10, Variable Cost Per Unit = $12, Machine Hours Per Unit = 0.5 hours.
2. Calculate CM Per Unit: $10 - $12 = -$2.
3. Formula (CM Per Machine Hour): CM Per Unit / Machine Hours Per Unit
4. Calculation: -$2 / 0.5 hours
5. Result: -$4 per machine hour.
Conclusion: A negative contribution margin per unit means the product doesn't even cover its variable costs. This results in a negative contribution margin per machine hour, indicating it loses money for every hour the machine is used on it. Such a product should typically be discontinued unless there's a strategic reason to sell it below variable cost.
Frequently Asked Questions
1. What is Contribution Margin Per Machine Hour?
It's a measure of the contribution margin generated for each hour a machine is utilized in producing a specific product. It helps evaluate product profitability relative to limited machine time.
2. How is it calculated?
The formula is: (Selling Price Per Unit - Variable Cost Per Unit) / Machine Hours Per Unit. The numerator is the standard Contribution Margin Per Unit.
3. Why is this metric important?
It's crucial when machine capacity is a bottleneck. It helps businesses decide which products are most profitable to produce when limited by machine time, guiding production scheduling and product mix decisions.
4. What are Variable Costs?
Costs that change in direct proportion to the volume of goods produced. Examples include direct materials, direct labor directly involved in production, and sales commissions.
5. Why are Fixed Costs excluded from the calculation?
Contribution margin focuses on the revenue remaining after covering only the costs directly tied to producing one more unit. Fixed costs (like rent, salaries, depreciation) don't change with each unit produced and are covered by the total contribution margin generated across all products.
6. What are "Machine Hours Per Unit"?
This is the average or standard amount of time a specific machine (or set of machines acting as a bottleneck) is required to manufacture one unit of a particular product.
7. What does a higher Contribution Margin Per Machine Hour mean?
A higher value indicates that a product is more efficient at generating contribution margin relative to the scarce machine time it consumes. These products should generally be prioritized if machine capacity is limited.
8. What if the Selling Price is less than the Variable Cost?
This results in a negative Contribution Margin Per Unit, and consequently, a negative Contribution Margin Per Machine Hour. This product is losing money on a per-unit basis before covering any fixed costs and should likely be discontinued unless there are strategic reasons to continue production.
9. What happens if Machine Hours Per Unit is zero?
The calculation results in division by zero, which is mathematically undefined. This metric is not applicable if a product doesn't require machine time; machine hours are not a constraint for that product.
10. Can this help compare different products?
Absolutely. This metric is primarily used to compare the profitability of different products when a specific machine or process with limited capacity (measured in hours) is the bottleneck. You would calculate the CM/MH for each product using that bottleneck machine's time and prioritize those with the highest values.
