IB Business Management HL

BMT 13 – Contribution | Business Management Toolkit | IB Business Management HL

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Unit 6: Business Management Toolkit — BMT 13: Contribution
What is Contribution?
Contribution is a key concept in management accounting. It refers to the value each unit sold adds toward covering the business's fixed costs and generating profit. Contribution analysis helps managers make decisions about pricing, output, and profitability.
Why is Contribution Important?
- Identifies the viability of products and services.
- Supports break-even and profit planning.
- Informs decisions about discontinuing or promoting products.
Contribution Per Unit
Contribution Per Unit shows how much one unit of product contributes to fixed costs and potential profit.
Formula:
Contribution\ per\ unit = Selling\ Price\ per\ Unit - Variable\ Cost\ per\ Unit
  • High contribution per unit suggests a product is more profitable.
  • Low contribution suggests reviewing price, costs, or product strategy.
Total Contribution
Total Contribution calculates the overall contribution from all units sold.
FormulaWhat It Means
Total\ Contribution = Contribution\ per\ unit \times Number\ of\ Units\ Sold Total added value from all units sold
Total\ Contribution = Total\ Revenue - Total\ Variable\ Costs Alternative formula using totals
Interpretation:
If Total\ Contribution > Fixed\ Costs, the business is profitable. If not, the business faces a loss.
Worked Example
Example: A business sells a product at \${18} each, with variable costs of \${11} per unit and sells 250 units.
  • Contribution per unit: 18 - 11 = 7
  • Total Contribution: 7 \times 250 = 1,750
  • If Fixed Costs are \${1,540}:
    Profit = 1,750 - 1,540 = 210
Key Uses of Contribution Analysis
  • Setting sales and profit targets
  • Break-even calculations
  • Product mix decisions
  • Evaluating special orders and discounts
  • Discontinuing loss-making products
Formulas for Quick Reference
  • Contribution per unit: C_{unit} = S_{unit} - VC_{unit}
  • Total Contribution: C_{total} = C_{unit} \times Q
  • Profit Calculation: Profit = Total\ Contribution - Fixed\ Costs
Conclusion
Understanding contribution empowers managers to make informed decisions about pricing, production, product lines, and financial goals. Accurate contribution analysis underpins profitability and strategic planning.
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