Posted in Finance, Accounting and Economics Terms, Total Reads: 1278
Definition: Contribution Analysis
Contribution analysis is the step by step approach designed by managers to assess about the contribution a program has made to some particular goal. It analyses the effect of the internal and the external factors in the contribution. It estimates the direct variable costs and the selling price of a range of products.
It computes how each unit sold will contribute towards recovering the fixed business costs, once the fixed costs are met these contribution becomes the profit of the firm. The contribution analysis also shows the constraints of the firm.
Contribution Margin=Unit selling price of a product- Variable Costs of the product
This contribution margin helps us assess the profitability of individual products.
If say the contribution margin of a particular product is 10% which is lower than other products in the business. If the variable costs of the product can’t be reduced the company may decide to drop the product. So a large firm does contribution analysis to take decisions mostly in case of pricing.