Posted in Finance, Accounting and Economics Terms, Total Reads: 730
Contribution is defined as the amount remaining after subtracting the direct costs like labour, material, project staff, salary, etc from the revenue. It contributes to the net income after taking care of the indirect costs like rent, wages, electricity, etc. In other words, contribution refers to the amount remaining after variable costs like selling and admin expenses have been deducted from the sales revenue. This amount is then used to settle the fixed costs and again contributes to the net income.
Where, sales revenue = number of goods sold * cost per good sold
Example – Suppose that company X sells 100 items for Rs 10 each. If Rs 200 is spent on the material for manufacturing those goods, Rs 150 is given away as salary and Rs 100 is spent on the labour, then the contribution is given by
Contribution = 100*10 – 200 -150 – 100
= 1000 – 450
= Rs 550
After subtracting the indirect costs from this contribution, the remaining amount will form the net income.