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Accounting and finance

Accounting and finance. Contribution and contribution per unit. Contribution. contribution provides a measure of how much a product contributes towards paying for the fixed overheads of a business. contribution = total revenue – total variable costs.

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Accounting and finance

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  1. Accountingand finance Contribution and contribution per unit

  2. Contribution • contribution provides a measure of how much a product contributestowards paying for the fixed overheads of a business contribution = total revenue – total variable costs • once fixed overheads have been covered, further contribution is straight profit contribution - fixed costs = net profit

  3. The use of contribution • working out contribution allows a business to have a clearer picture of relative costs by removing overheads (fixed costs) which are difficult to allocate in cases where more than one product is made • contribution per unit is one of the most useful concepts in business studies. It helps a business to calculate: profits minimum selling prices break-even output

  4. Contribution exercise • JV videos has fixed costs of £20,000 per month and sales of 2000 units; variable costs are £10 and the selling price is £30 per unit. Should it cut its prices given that a 10% price cut should boost sales by 25%?

  5. JV Videos answer Answer – YES, providing spare capacity exists to produce the extra 500 units • Method: calculating old and new profits using contribution Total contribution – fixed costs = profit Old profit; CPU = £20 (£20 x 2000) - £20,000 = £20,000 New profit; CPU = £17 (£17 x 2500) - £20,000 = £22,500

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