Contribution per unit is the selling price minus the variable cost of one unit. It tells you how much each sale adds towards paying the fixed costs and then making profit. Exam questions ask you to calculate it, to find total contribution, and to say what it means for profit.
This lesson follows classifying fixed and variable costs in costs, revenue and break-even. You need the sorting skill because only variable costs go into contribution.
How is contribution calculated?
Use these formulas in this order:
- Contribution per unit = selling price per unit − variable cost per unit
- Total contribution = contribution per unit × units sold
- Profit = total contribution − total fixed costs
You can also state contribution as a percentage of price: contribution per unit ÷ selling price × 100. It shows how much of each ringgit of sales is left after variable costs.
Fixed costs are not part of contribution. They are deducted once, after total contribution has been found. That is why contribution is not the same as profit.
Worked example
Cetak Tee Studio in Johor Bahru prints custom T-shirts and sells each for RM35. A plain shirt costs RM14 and the ink and printing cost RM6 per shirt.
Fixed costs are RM4,500 a month. In March it sells 400 shirts.
Calculate contribution per unit, total contribution, profit and contribution as a percentage of price.
Step 1, variable cost per shirt. 14 + 6 = RM20.
Step 2, contribution per shirt. 35 − 20 = RM15.
Step 3, total contribution. 15 × 400 = RM6,000.
Step 4, profit. 6,000 − 4,500 = RM1,500.
Step 5, contribution percentage. 15 ÷ 35 × 100 = 42.857…, so 42.9% to one decimal place.
Check by the long way. Revenue = 35 × 400 = RM14,000. Variable costs = 20 × 400 = RM8,000. Fixed costs = RM4,500. Profit = 14,000 − 8,000 − 4,500 = RM1,500. Both routes agree.
Reading the result. Each shirt adds RM15 towards the fixed costs. After 300 shirts the studio has RM4,500 of contribution, exactly enough to cover the fixed costs. Every shirt after that adds RM15 of profit.
The mistake to watch for
A common slip is to leave out part of the variable cost, or to deduct a fixed cost per unit.
Mistaken working: Contribution per shirt = 35 − 14 = RM21.
The student used only the shirt cost and forgot the ink and printing.
Contribution of RM21 would give 400 × 21 = RM8,400 and an apparent profit of RM3,900, which is RM2,400 too high. The correction is to list every cost that rises with each unit before subtracting. Ask of each cost in the case: does it depend on how many shirts are made?
Check yourself
Try these on paper, then open each answer.
1. A stall sells a drink for RM12. The variable cost is RM7.50 per drink. Calculate contribution per drink and total contribution for 500 drinks.
Show answer
Contribution per drink = 12 − 7.50 = RM4.50. Total contribution = 4.50 × 500 = RM2,250.
2. A firm has total contribution of RM9,600 and fixed costs of RM7,000. Calculate profit. Then say why contribution alone does not show profit.
Show answer
Profit = 9,600 − 7,000 = RM2,600. Contribution ignores fixed costs, so it only shows what is left to cover them. Profit appears only after the fixed costs are deducted.
3. A product sells for RM50 with variable cost of RM38 per unit. Fixed costs are RM3,000. How much total contribution is needed to cover the fixed costs, and how many units must be sold to reach it?
Show answer
Contribution per unit = 50 − 38 = RM12. Total contribution needed = RM3,000. Units = 3,000 ÷ 12 = 250 units. Check: 250 × 12 = RM3,000.
Where this leads next
The answer to question 3 is already a break-even figure, and the next lesson shows how to read a break-even chart that displays the same point as a crossing of two lines. The break-even and contribution explorer lets you change the price and variable cost to see what happens, and the ratios tool can check a percentage such as the contribution rate.
Some students follow each formula but still mix up contribution and profit under time pressure. That is a pattern a teacher can spot quickly in online one-to-one Business tuition.