Question

What is contribution?

Hint:

Think of contribution as the 'money-making power' of each sale. For every product you sell, the contribution is the amount of money you've generated that can be used to pay your fixed bills (like rent and salaries).

Answer 1

In cost and management accounting, Contribution (also known as Contribution Margin) is the surplus revenue remaining after deducting total variable costs from total sales revenue. This surplus amount is the portion of revenue that is available to "contribute" towards covering the fixed costs of the business and then generating a profit.
It is a key concept in marginal costing and break-even analysis.
The formula for calculating contribution is:
\[ Contribution = Sales Revenue - Variable Costs \] Alternatively, it can be expressed on a per-unit basis:
\[ Contribution per unit = Selling Price per unit - Variable Cost per unit \] The significance of contribution lies in its use for various managerial decisions:
Profit Calculation: Profit is calculated as Contribution minus Fixed Costs. \[ \text{Profit} = \text{Contribution} - \text{Fixed Costs} \]
Break-Even Analysis: The break-even point is the level of sales at which total contribution equals total fixed costs (resulting in zero profit).
Decision Making: It helps in decisions like product mix optimization, make-or-buy decisions, and accepting or rejecting special orders, as it focuses on how each unit sold contributes to covering fixed expenses.