13. Contribution Flashcards
<p>contribution</p>
<p>It is the amount of money left over from a sale after variable costs have been covered</p>
<p>overheads</p>
<p><span><strong>overheads</strong></span><span> an overhead cost or expense, for example lighting,equipment and any extras paid for out of a centralised budget</span></p>
<p>unit contribution</p>
<p><span>Contribution per unit =</span></p>
<p><span>selling price — variable cost</span></p>
<p>total contribution</p>
<p><span>option1) Total contribution =</span></p>
<p><span>total revenue — total variable cost</span></p>
<p><span>option 2) Total contribution = unit contribution x number of unitssold</span></p>
<p>uses for contribution</p>
<ol><li><span>calculate the break-even level of</span><span><strong> output</strong></span><span></span></li><li><span>calculate the amount of profit made by a business</span></li><li><span>calculate the amount that needs to be sold to reacha specific profit target</span></li><li><span>help a business to decide which order to accept when faced with a choice</span></li><li><span>help a business decide what price to charge for a product.</span></li></ol>
<p>how to find break even with contribution</p>
<p>break even = fixed costs/contribution</p>
<p>how to find profit with contribution</p>
<p><span>Profit =</span></p>
<p><span>total contribution — fixed costs</span></p>
<p>contribution to find output needed for profit target</p>
<p>output = (fixed costs + profit target) / contribution</p>
<p>what is contribution costing and how does it help a business making decisions</p>
<ol><li><span>contribution costing - the use of contribution to help makedecisions based on costs, such as which order to accept</span></li><li><span>A business might use contribution when making certain types of decision. For example, sometimes a business will have to decide which order(s)or contract(s) to accept when faced with a choice fromdifferent customers. This may be because the business does not have enough capacity to accept all the orders it receives. Or it may be that they are not all financiallyviable (i.e. capable of financial success).</span><span><strong> Contributioncosting</strong></span><span> can help here.</span></li></ol>
<p>what is contribution pricing and how does it help a business + eval</p>
<ul><li><span>the use of contribution to help makedecisions based on costs, such as which order to accept</span></li><li><span>A business may use contribution when deciding what price to charge. This involves setting a price that exceeds the value of variable cost.</span></li><li><span>This means that a particular order orproduct will always make a contribution when sold.</span></li><li><span><i>This approach ignores fixed costs because a single order orproduct may not generate enough contribution to coverfixed costs. This approach needs to be used carefully.Obviously, to make a profit fixed costs have to be covered.</i></span></li><li><span>.</span></li></ul>
<p>when is contribution pricing more likely</p>
<p><span>Contribution pricing is more likely to be usedwhen fixed costs are low or when a business, throughexperience, knows that fixed costs will be covered</span></p>
