HELP BUSINESS FINANCE!! What does contribution mean?

[Billy Bob]

I have been asked to work out the maximum contribution for a business? What does contribution mean???

[Greensand]

Different accountants will give you different definitions of contribution which isn't at all helpful.

They way I look at it is this: -

Sales less material purchase costs = Gross Margin
Gross Margin less Direct Labour and Overheads = Contribution
Contribution less Indirect Labour and Overheads (aka Fixed costs) = Trading or Operating Profit.

Direct Labour and Overheads is used in factories and is the cost that varies (over time) with the production/sales volume. Fixed costs tend to stay the same regardless of how much is produced.

If you don't have an production and you only have materials purchase costs then gross margin and contribution are effectively the same thing.

I hope this helps, but let me know if you want any more info.

I do offer finance awareness training, please take a look at my website.

[Andrew C]

Nice bit of advice there Greensand :)

[Billy Bob]

Thanks Greensand. Much apreciated.