Contribution and decisions
Use contribution to analyse costs while recognising what the calculation leaves out.
What you will learn
- Calculate unit and total contribution.
- Distinguish contribution from profit.
Contribution covers fixed costs
Contribution per unit is selling price minus variable cost per unit. Total contribution is this amount multiplied by units sold. Subtract fixed costs to calculate profit in the simple model.
A high contribution per unit does not alone identify the best product if sales volumes, scarce resources or strategic effects differ.
Context changes the decision
For a special order, positive additional contribution can matter when spare capacity exists and fixed costs do not change. However, the decision must also consider displaced regular sales, extra costs, customer reactions and longer-term pricing effects.
Use the figures to support a reasoned decision, not to replace evaluation. State which costs are relevant to the particular choice.
Worked example
A product sells for $30, variable cost is $18, sales are 500 units and fixed costs are $4000. Find total contribution and profit.
Show the worked solution
- Unit contribution is 30−18=$12.
- Total contribution is 12×500=$6000.
- Subtract fixed costs: 6000−4000.
Answer Contribution $6000; profit $2000
Common mistakes
- Contribution is before fixed costs, not after them.
- Positive unit contribution does not guarantee overall profit.
What can you explain now?
Price is $24 and variable cost is $15. Find contribution per unit.
Compare with the explanation
$9
Subtract the variable cost from selling price: 24−15.
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