6.1.13 (HL)—Contribution

Contribution per unit = selling price − variable cost per unit; total contribution = sales revenue − total variable costs. Contribution costing assigns variable costs to units and treats fixed costs separately for the period, while absorption costing includes an allocated share of fixed production overhead in each unit's full production cost.

Contribution costing shows how each sale covers fixed costs and profit and supports short-run product, pricing, capacity and make-or-buy choices when relevant fixed costs are identified. Absorption costing gives a fuller unit production cost for inventory valuation and longer-run pricing, but the overhead allocation method can change apparent product profitability without changing total business cost.

For make-or-buy, compare cost to make = avoidable fixed cost + internal variable cost per unit × quantity with cost to buy = supplier price per unit × quantity + relevant purchasing costs. Then evaluate capacity released, quality, reliability, control and supplier dependence; exclude allocated overhead that remains under both options.

A product sells for $15 with variable cost$9, so contribution is $6 per unit. At 2,000 units total contribution is$12,000; after fixed costs of $8,000, profit is$4,000. If absorption allocates $3 fixed overhead per unit, full production cost is$12, but that allocation is not automatically avoidable in a make-or-buy decision.

Contribution is not profit until fixed costs are covered, contribution costing is not the same as absorption costing, and a lower supplier quote does not prove buying is cheaper when relevant transaction costs and strategic effects are included.