What it means in practice
It describes what a sale contributes towards fixed costs and profit on that stated basis. Include variable selling fees where relevant and say which costs remain outside the calculation. Contribution helps compare offers and examine break even volume, but it is not a substitute for a complete profit statement. A positive contribution does not prove that total demand is sufficient to cover the business's fixed commitments. Use the measure to ask whether an additional sale helps cover the remaining costs. A positive contribution may still be insufficient if volume is too low or a scarce resource is consumed inefficiently. A negative contribution deserves investigation before promotion increases demand. Confirm that the price reflects normal concessions and that the variable cost includes the work actually required to deliver the offer.
A fictional worked example
A product selling for ₦10,000 with ₦6,000 variable cost contributes ₦4,000 before any omitted costs.
A useful question
What does one additional sale leave after the costs it directly creates?
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