Imagine you run a pizza shop that sells a standard pizza for £10.
The cost of ingredients (flour, cheese, sauce) is £4, and the cost of the oven
and staff for that pizza is £2. The contribution of one pizza is the
amount that covers the fixed costs and adds to profit:
£10 - £6 = £4.
📊 This simple idea is called contribution costing.
When a customer asks for a special order – say a large pizza
with extra toppings – the shop must decide whether to accept it.
Contribution costing helps by showing how much extra revenue the order
will bring after covering its own variable costs. If the extra revenue
is higher than the extra variable cost, the order is a good idea.
(e.g., £5 for extra toppings).
\$P - V = C\$
where \$P\$ = price, \$V\$ = variable cost, \$C\$ = contribution.
(often none for a single order).
| Item | Cost (£) |
|---|---|
| Special Order Price | 12 |
| Variable Cost (extra toppings) | 5 |
| Contribution | 7 |
Since the contribution (£7) is positive and there are no extra fixed costs,
the special order should be accepted. 💡
Read the question carefully. Look for words like “special order,” “extra cost,” or “fixed cost.”
Show your calculations. Use the formula \$C = P - V\$ and state each value.
Explain your decision. Mention whether the contribution covers any incremental fixed costs and whether it affects normal sales.
??
Tip: If the contribution is negative, say the order should be rejected.
A customer offers £10 for a special order.
What is the contribution per unit?
Answers:
1️⃣ £10 - £3 = £7.
2️⃣ Yes, because the contribution is positive and there are no additional fixed costs.
🎉 Great job!