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