Contribution

Supports businesses in deciding what work to take on, work with the largest contribution would usually be chosen.
Plays a role in deciding whether a business should make or buy
Calculate how many units need to be sold to break-even

Contribution per unit (CPU) = price per unit – variable cost per unit

Total contribution (at a certain quantity) = contribution per unit × quantity (output)

Contribution analysis (Pros & Cons)

Advantages	Disadvantages
Break-even. Contribution calculations are part of the break-even analysis that is needed to determine the viability of a business.	Assumptions. Contribution analysis is based on many assumptions about conditions in the internal and external environment, and how indirect costs may be integrated. If assumptions change, the result of the contribution analysis may be different. The calculations might also change depending on the time period used.
Choosing work (orders).When a business has more work or orders than it can take on, it should choose the work or orders that have the largest contribution value.	Only one tool among many. Contribution analysis is a valuable quantitative tool, but it is only one of many tools for decision-making. Businesses should consider both quantitative and qualitative information, including ethics concerns.
Make or buy. Contribution analysis is a quantitative tool used to determine whether a business should make or buy a product or component.

Indirect costs calculations

Contribution costing

A method of analysing costs to support decision-making, that only analyses the direct costs of a cost centre.

Contribution costing is a cost accounting method that only considers the direct costs of the product, department or region and their resulting contribution to covering the indirect costs of the business as a whole.

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Absorption costing

In this method of costing, a business allocates the indirect costs to the different cost centres.
The appeal of the absorption method is that it gives an apparent profit figure for each product.

Absorption costing is a cost accounting method that allocates indirect costs among products, departments or regions based on predetermined criteria such as output, sales revenue, number of employees or the value of the equipment.

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Determining break-even point

BEQ = FC ÷ CPU