## Contribution

The term **contribution** refers to the excess of selling price over a product’s variable cost. Thus, contribution is the difference between the sale price and variable cost. In other words:

Contribution (C) = Sales – Variable cost (or Fixed cost) + Profit

### Example

Suppose that sales are $80,000, variable cost is $40,000, and fixed cost amounts to $30,000. Using this information to calculate contribution, it follows that:

Contribution = Sales – Variable cost

= $80,000 – $40,000

= $40,000

### Usefulness of Contribution

Contribution is useful for a company’s management in the following ways:

**1. When calculating BEP:** At the break-even point (BEP), sales values and total costs are equal. Excess output over BEP output will result in profit.

**2. Provides information about desired profit:** Profit happens when the contribution exceeds the fixed costs. The amount of profit that a company aims to earn depends on its cost of capital.

The BEP is a no-profit no-loss area, where the desired profit is represented as an addition over the BEP.

To calculate profit based on contribution and fixed costs, the formula is:

Profit = Contribution – Fixed costs

**3. Selection of best alternative:** The concept of contribution helps to evaluate alternative proposals (e.g., whether to change the sales mix or enter an overseas market).

## Break-Even Point (BEP)

The break-even point, or BEP, is the point at which the cost incurred and the revenues generated are equal. It is also known as zero-point costs. Excess output and sales over BEP is an indicator of profit.

The formula for BEP is as follows:

BEP sales = Fixed expenses + Variable costs

BEP in units: Fixed expenses $80,000 sale price per unit $20, variable cost $15. Thus BEP (Units)

BEP= Fixed expenses / C

= 80,000 / 5

= 16,000 units

### Verification

Sales value = 16,000 units x 20 | $320,000 |

Variable cost = 16,000 x 15 | 240,000 |

Fixed cost | 80,000 |

Total cost | 320,000 |

(0) Zero |

BEP (Sales) = BEP units x Per unit sale

= 16,000 x 20

= $320,000

### Usefulness of Break-Even Point (BEP)

The break-even point (BEP) is used in the following main ways:

**1. Knowledge of profitability:** The BEP offers information about the profitability of specific products.

**2. Helpful in changing sales price**: The BEP is useful in changing sales price and its effects on business.

**3. Desired profit:** The BEP is useful in knowing the amount of desired profits.

**4. Useful for expansion:** The BEP is helpful in learning about the expansion possibilities of the business.

**5. Useful for knowledge about profit or loss on different levels of output:** BEP provides clear data about profit and loss. When sales exceed the BEP, profit is possible; when sales are lower than the BEP sales, losses are probable.