Explain Contribution Margin ?

What is the meaning Contribution Margin ? How is use ? etc

Questions by Biju T P

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  • Aug 17th, 2008

In cost accounting the concept of Contribution exist.

Costs are bifurcated into Fixed and Variable.

Equation is simple: fixed cost + variable cost + profit = sale price

in short sale price - variable cost = fixed cost + profit

This "Fixed cost + profit" is called Contribution.

When any project is undetaken then its contribution is taken into account.

Say you want to produce something product x. Fixed costs are 1 lakh variable costs are Rs. 10 per unit. Say you are producing 10000 units of product x.

so contribution = (10,000 units x 10 per product) = Rs. 1,00,000 variable cost

if you are selling the product at Rs. 20 then 20*10000 = 2 lakh sale price

So 2,00,000 - 1,00,000 = fixed cost + profit (contribution Rs. 1,00,000/-)

Now since your fixed cost are Rs. 1 lakh your contribution just cover your fixed cost and does not make any profits. So either increase your production or selling price.


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