Contribution is the name given to the excess of monies earned over and above the direct costs incurred in generating that income.
For example, if a company was engaged in the making and selling of chairs. For each chair it sold it received the following income and incurred the costs listed below.
Income £50
Costs:
Wood £10
Direct labour £5
Glue £2
Varnish £2
The total direct costs are 10 + 5 + 2 + 2 = £19
The contribution which the sale of this chair is said to generate is therefore £31 (50 – 19)
It is very important to note that contribution is not the same as profit. Costs involved in calculating contribution are only the direct costs of producing that item. Profit is
achieved by taking all expenditure, both direct and indirect in to consideration.
Indirect expenses such as rent, rates, selling costs and others which can not be directly attributed to one particular product or service have been covered in order for the company to make a profit.
|