The Concept of Contribution and its Significance
Contribution is the difference net sales and marginal costs, and it is used to recover fixed costs first. Any excess over fixed costs would be profits. When a business manufacturers more than one product, the computation of profits realized on individual products may be difficult due to the problem of apportionment of fixed costs to different products., the rationale of contribution lies in the fact that fixed costs are done away with under marginal costing. The concept of contribution helps to determine the breakeven points, profitability of products, departments, etc., to select product-mix for profit maximization, and to fix selling prices under different circumstances such as trade depression, expert sales prices discrimination etc. contribution is the definite test to ascertain whether a product or process is worthwhile to continue among different products or processes.
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