Summary: Contribution measures how much a product contributes to the fixed costs of a business and, therefore, its overall profit. It can be calculated on a per-unit basis or total basis. Knowing the total contribution and fixed costs enables us to calculate the profit of a business.

Definition: Contribution is the amount a product contributes towards the fixed costs of a business and its overall profit, after deducting the variable costs.

Formula

• Contribution per unit = Selling price per unit - Variable cost per unit
• Total contribution = Total sales revenue - Total variable costs
• Total contribution (alternative) = Contribution per unit × Number of units sold

Example: Imagine a business that manufactures and sells wooden tables. Each table is sold for $150, and the variable cost (cost of wood) is $60 per table. The contribution per table is calculated as

• Contribution per unit = $150 (price) - $60 (variable cost) = $90

If the business sells 100 tables, the total contribution is:

• Total contribution = $90 (contribution per unit) × 100 (units sold) = $9,000

Definition: Profit is the amount left after all expenses (both fixed and variable) are deducted from the total sales revenue.

Formula

• Profit = Total contribution - Total fixed costs

Example: Continuing with the wooden table business, let's say the total fixed costs (salaries, rent, insurance, etc.) are $5,000. The profit is calculated as

• Profit = $9,000 (total contribution) - $5,000 (total fixed costs) = $4,000