Contribution and operating result
The basic task of marginal costing: unit contribution first, then total contribution, and fixed costs come off as one block at the end.
Worked example
A company sells 3,100 units a year at £77.00 each. Variable costs are £45.00 per unit and fixed costs £66,000.00 a year. Work out the unit contribution, the total contribution and the operating result.
Worked solution
- 1.Unit contribution = price − variable cost = £77.00 − £45.00 = £32.00
- 2.Total contribution = £32.00 × 3,100 = £99,200.00
- 3.Operating result = contribution − fixed costs = £99,200.00 − £66,000.00 = £33,200.00
Typical mistake: Spreading fixed costs per unit and taking them off the unit contribution. Contribution only deducts variable costs; fixed costs come off at the end.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
A company sells 1,450 units a year at £115.00 each. Variable costs are £62.00 per unit and fixed costs £100,000.00 a year. Work out the unit contribution, the total contribution and the operating result.
Unit contribution in £
Total contribution in £
Operating result in £ (loss with a minus)
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Unit contribution = price − variable cost per unit
- Total contribution = unit contribution × quantity
- Operating result = total contribution − fixed costs
- Several products: add the contributions, then deduct fixed costs once.
Typical mistake: Spreading fixed costs per unit and taking them off the unit contribution. Contribution only deducts variable costs; fixed costs come off at the end.
Frequently asked questions
What is the typical mistake in "Contribution and operating result"?
Spreading fixed costs per unit and taking them off the unit contribution. Contribution only deducts variable costs; fixed costs come off at the end.
What does a positive contribution mean?
Each unit covers its variable costs and adds something towards fixed costs. Whether there is a profit depends on total contribution exceeding fixed costs.