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It is calculated using the following formula:

            Contribution per unit  =  selling price  -  variable cost


To find the total contribution is found by multiplying the contribution per unit by the total quantity sold.  The contribution is first of all used to pay the fixed costs, any contribution left over is described as profit.  We can therefore calculate profit in another way:

            Profit  =  contribution  -  fixed costs


Contribution is a useful way of calculating profit when a company has more than one product.  It allows manager to view how much contribution each of the products is making, hence making decisions about future product easier.



E-mail Steve Margetts