Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
A) Contribution: selling price – variable cost per unit
Full specification wording
The relationship between revenue and costs: a) Contribution: selling price – variable cost per unit
Contribution per unit is a vital financial concept that measures how much each product sold contributes towards paying off a firm's fixed costs and subsequently generating profit.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 1 of 5
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Contribution per unit is a vital financial concept that measures how much each product sold contributes towards paying off a firm's fixed costs and subsequently generating profit. It is calculated using the formula: Contribution per unit = Selling price per unit - Variable cost per unit. For instance, if a company sells a product for £25 and the variable cost (such as raw materials and direct labour) to produce one unit is £10, the contribution per unit is £15. This £15 first goes towards covering fixed costs like rent. Once all fixed costs are covered (the break-even point), every additional £15 of contribution becomes pure profit. Understanding this relationship helps businesses make pricing and production decisions.
What earns the marks
- Identify the selling price per unit from the provided business scenario.
- Identify or calculate the total variable cost per unit by summing materials, direct labour, and other variable expenses.
- Subtract the variable cost per unit from the selling price per unit.
- Recognise that the resulting figure is the contribution per unit, not the final profit per unit.
- Apply the contribution per unit to determine how fixed costs are covered.
Common mistakes and how to put them right
Confusing contribution with profit.
Put it right: Contribution must first cover fixed costs before profit is made, so they are not the same until fixed costs are zero.
Deducting fixed costs when calculating contribution per unit.
Put it right: Only variable costs should be subtracted from the selling price.
Failing to sum all variable cost components.
Put it right: Ensure all variable costs, such as packaging and direct labour, are summed before subtracting from the selling price.
Exam tips
- Read the data carefully to ensure you are using per-unit figures rather than total figures when calculating contribution per unit.
- Remember that if contribution per unit is negative, the product is losing money on every unit sold, even before fixed costs are considered.
- Use contribution per unit as a stepping stone for break-even calculations, as the break-even point is fixed costs divided by contribution per unit.
Try the lesson
The start of the The relationship between revenue and costs: a) Contribution: selling price – variable cost per unit lesson, made from checked teaching notes for this specification point.
Have a go first
A business sells a product for £25. The variable cost per unit is £10. What is the contribution per unit?
Listen
Contribution per unit is a vital financial concept that measures how much each product sold contributes towards paying off a firm's fixed costs and subsequently generating profit. It is calculated using the formula: Contribution per unit = Selling price per unit - Variable cost per unit. For instance, if a company sells a product for £25 and the variable cost (such as raw materials and direct labour) to produce one unit is £10, the contribution per unit is £15. This £15 first goes towards covering fixed costs like rent. Once all fixed costs are covered (the break-even point), every additional £15 of contribution becomes pure profit. Understanding this relationship helps businesses make pricing and production decisions. A strong answer earns marks for these points. Identify the selling price per unit from the provided business scenario. Identify or calculate the total variable cost per unit by summing materials, direct labour, and other variable expenses. Subtract the variable cost per unit from the selling price per unit. Recognise that the resulting figure is the contribution per unit, not the final profit per unit. A common slip: Confusing contribution with profit. Instead, contribution must first cover fixed costs before profit is made, so they are not the same until fixed costs are zero. Exam tip: Read the data carefully to ensure you are using per-unit figures rather than total figures when calculating contribution per unit.
See it
Key words
Say what each word means before you turn the card.
Contribution per unit
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Break-even point
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Variable cost per unit
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Fixed costs
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See every definition
- Contribution per unit
- A measure of how much each product sold contributes towards paying off a firm's fixed costs and subsequently generating profit, calculated as selling price per unit minus variable cost per unit.
- Break-even point
- The point at which all fixed costs are covered, after which every additional contribution becomes pure profit.
- Variable cost per unit
- The cost, such as raw materials and direct labour, of producing one unit, which is subtracted from the selling price per unit.
- Fixed costs
- Costs such as rent that contribution first goes towards covering before any profit is generated.
Label the diagram
Some boxes have lost their names. Pick the right name for each number.
1Box 1
2Box 2
3Box 3
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