Understanding Contribution

Contribution represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.

Equation 1

C = S – VC

Where

C = Contribution

S = Sales Revenue

VC = Variable Costs

Equation 2

P = S – VC – FC

Where

P = Profit

S = Sales Revenue

VC = Variable Costs

FC = Fixed costs

Working on Equation 2

S = P + VC + FC

Replacing this value in Equation 1 we get

C = P+VC+FC – VC

Hence C = P + FC

We derived that contribution equals profit plus fixed costs.

Hope this helps.

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