1. 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

2. 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
= ($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

3. 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