Contribution Analysis

Abstract

Abstract Contribution analyzis involves calculating the increase in operating profits that results from a given production or marketing decision. It is a short‐run decision tool, meaning that it ignores fixed costs that are unaffected by the decision at hand, and looks only at the incremental costs and benefits of the decision. The total contribution to the bottom line, or the difference between revenue generated and the variable costs of production and sales, represents how much operating profit can contribute to covering fixed costs and generating a net profit. In the short run, maximizing contribution and maximizing profits are identical concepts. Contribution analysis can inform pricing, output, production, and promotion decisions.

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