Chapter 27- contribution Flashcards
What do businesses need to cover in order to make a profit?
- its costs
What can help the business decide whether a product is making a profit, that is contributing towards a profit?
- Contribution analysis
What is contribution?
- the revenue received from selling a product minus the variable costs of producing that good
When is there a contribution to the fixed costs?
- When the revenue is greater than the variable costs
What happens if the fixed costs have already been paid for?
- any contribution will be making a profit
What is contribution costing sometimes called?
Marginal costing
What is the contribution per unit (cpu)?
It is the contribution of each unit of production to the overheads
CPU= price- variable costs
What is total contribution?
How much in total is contributing to the fixed costs
Total contribution= cpu x sales
What is profit?
The revenue left over after paying the fixed costs
Profit= total contribution - fixed costs
How can the contribution method be used?
- to calculate how much an individual product contributes to the fixed costs or profits
- and to compare how more than one product within a business contributes to the fixed costs of that business
What does the contribution method allow a business to assess?
- the level of profit for each product it makes
- it allows the business to see which products are contributing the most to cover its fixed costs
What is the advantage of contribution costing?
- fixed costs don’t have to be allocated at all
Special orders
- if the business were to be offered an additional or special order, the calculation of contribution is very helpful
What will additional contribution add to?
Profit of the business because fixed costs have already been covered
