Variable costs directly depend on production levels. For instance, a company manufacturing hats incurs $5 in material costs per unit. If it produces 1,000 hats, the total variable cost is $5,000.

Contribution per unit = Selling price per unit – Variable costs per unit Once the contribution per unit is found, the break-even output can be calculated: Break-even output = Fixed costs ÷ ...

The selling price minus the variable costs is the contribution margin. The contribution margin is $120 ($200 - $80) if a product sells for $200 per unit and the total variable costs are $80 per unit.