Contribution

Contribution or the contributory margin is the difference between sales
value and the marginal cost. It is obtained by subtracting marginal cost from sales
revenue of a given activity. It can also be defined as excess of sales revenue over the
variable cost. The difference between sales revenue and marginal/variable cost is
considered to be the contribution towards fixed expenses and profit of the entire business.
The contribution concept is based on the theory that the profit and fixed expenses of a
business is a ‘joint cost’ which cannot be equitably apportioned to different segments of
the business. In view of this difficulty the contribution serves as a measure of efficiency of
operations of various segments of the business.