Study Notes

# Contribution and Contribution per Unit

- Level:
- AS

- Board:
- AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

What is contribution? The concept of **contribution** is a crucial one in business. It focuses on the returns (contribution) a business makes from each unit of product sold and whether that return is enough to allow the business to make money overall after taking account of its fixed costs.

Contribution looks at the profit made on individual products. It is used in calculating how many items need to be sold to cover all the business' costs (variable and fixed).

Let's start with a really important definition & formula

*Definition:*

**Total Contribution is the difference between Total Sales and Total Variable Costs**

*Formulae:*

**Contribution = total sales less total variable costs**

**Contribution per unit = selling price per unit less variable costs per unit**

Total contribution can also be calculated as:

**Contribution per unit x number of units sold**

Let's look at a simple worked example of contribution. Here is some information about a business that just sells one product:

- Selling price per unit £30

- Variable cost per unit £18

- Contribution per unit £12 (i.e. £30 less £18)

- Units sold 15,000

Using the formulae, we can perform the following calculation:

Contribution = £180,000 (i.e. £12 x 15,000 units)

Looking at the contribution per unit above (£12), you should be able to see that it can be increased by:

- Increasing the selling price per unit - i.e. more than £30

- Lowering the variable cost per unit - i.e. less than £18

Note that the total contribution of £180,000 is **not the total profit** made by the business. Why? This is because we have not yet taken account of the **fixed costs** of the business. Let's do that now...

Imagine that, in the example above, the business has the following fixed costs:

Admin: £18,000

Marketing: £25,000

Payroll: £50,000

Other overheads: £23,000

Total: £116,000

The total fixed costs of the business are £116,000. If we take these away from the contribution (£180,000), then we can calculate the overall profit or loss of the business:

**Total profit = contribution less fixed costs**

Total profit = £180,000 - £116,000

= a profit of £64,000 (i.e. £180,000 less £116,000)

In the above example we calculated **contribution per unit **by subtracting variable cost per unit from selling price per unit.

Contribution per unit is a really useful number to have. Make sure you know the formula and are confident in calculating it!

### You might also like

### Breakeven Analysis

Teaching PowerPoints

### Calculating Profit, Contribution and Breakeven

Topic Videos

### Calculating Breakeven Output - Chart Method

Study Notes

### Calculating Breakeven Output - Formulae

Study Notes

### Breakeven and Contribution (GCSE)

Study Notes

### Operations: Introduction to Break-even Analysis

Study Notes

### Breakeven Point (GCSE)

Study Notes

### Introduction to Business Costs (Revision Presentation)

Teaching PowerPoints