Accounting and finance Contribution and contribution per unit
Contribution contribution provides a measure of how much a product contributes towards paying for the fixed overheads of a business contribution = total revenue – total variable costs contribution - fixed costs = net profit once fixed overheads have been covered, further contribution is straight profit
The use of contribution working out contribution allows a business to have a clearer picture of relative costs by removing overheads (fixed costs) which are difficult to allocate in cases where more than one product is made contribution per unit is one of the most useful concepts in business studies. It helps a business to calculate: profits minimum selling prices break-even output
Contribution exercise JV videos has fixed costs of £20,000 per month and sales of 2000 units; variable costs are £10 and the selling price is £30 per unit. Should it cut its prices given that a 10% price cut should boost sales by 25%?
JV Videos answer Method: calculating old and new profits using contribution Total contribution – fixed costs = profit Old profit; CPU = £20 (£20 x 2000) - £20,000 = £20,000 New profit; CPU = £17 (£17 x 2500) - £20,000 = £22,500 Answer – YES, providing spare capacity exists to produce the extra 500 units