Define Contribution.

Contribution:

Contribution is the difference between sales and variable costs or marginal costs. It also may be defined as the difference between the selling price per unit and the over-variable cost per unit.

If the selling price of a product is Rs.100/- per unit and variable cost per unit is Rs.80/-, contribution per unit is Rs.20/-.

Contribution can be represented as:

Contribution = Sales – Variable or Marginal Cost

or, Contribution = Fixed Cost + Profit.

Advantage of Contribution

  1. It aids management in establishing selling pricing.
  2. It assists in determining the break-even point.
  3. It helps the management in the selection of an appropriate product mix for profit maximization.
  4. It aids in selecting the producing technique that contributes the most highly among several alternatives.
  5. It aids management in determining whether to buy or produce a good or component.
  6. It helps in taking a decision as regards introducing a new product in the market.
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