CONTRIBUTION Sold for $1.00 FIXED COSTS (transport, rent, utilities etc.): $3.00 Sold for $1.00 VARIABLE COSTS (sugar, food colouring etc.): $0.40

The $0.60 cannot be ‘profit’ because we have the Fixed Costs to cover still. This $0.60 is in fact something we call ‘Contribution” $1.00 $0.40 $0.60 Each new unit of output (lollipop) creates a new set of Variable Costs : so the inflows that remain are $0.60 (Price – Variable Cost) Fixed Cost of $3.00 0.60- 3.00 = ($2.40) 1.20 – 3.00 = ($1.80) 1.80 – 3.00 = ($1.20) 2.40 – 3.00 = ($0.60) 3.00 – 3.00 = $0.00 P R O F I T $0.60 X1 =$0.60 $0.60 X2 =$1.20 But we do want to do more than just Break Even So after 5 units of output our Fixed Costs are covered. We have not made any Profit yet – we have simply ‘broken even’ So after 6th unit and beyond is contributing to Profit & the increasing of Profit

SO WHAT IS CONTRIBUTION THE INFLOWS GENERATED BY THE SALES OF A UNIT – AFTER THE VARIABLE COSTS HAVE BEEN DEDUCTED. THIS SUM WILL FIRST CONTRIBUTE TO THE COVERING OF FIXED COSTS – THEN CONTRIBUTE TO THE CREATION OF PROFITS CONTRIBUTION = SALES PRICE – VARIABLE COST