Compare full and contribution costing
Calculate contribution, distinguish it from profit and compare full-cost and contribution approaches with their uses and limits.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 5.4.2. Cambridge states that both current versions have no significant changes affecting teaching. This lesson maps only its named section; other sections and full paper practice remain separate. Written practice is self-checked
Before you begin
- No previous business course is assumed. Use the lesson's definitions before applying them to the business context.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is contribution per unit calculated?
What you will learn
- Explain full and contribution costing
- Calculate contribution and profit
- Assess when each approach may inform decisions
Full costing allocates all production costs
Full costing includes variable production costs and an allocated share of fixed production overhead in product cost. A simple full cost per unit is total production costs divided by units produced, using the chosen allocation basis.
It can help assess longer-run cost recovery and pricing, but shared fixed-cost allocations are estimates. A price above full cost does not guarantee sales, and a product may appear unprofitable because of how overhead is allocated.
Contribution isolates the variable-cost margin
Contribution per unit = selling price−variable cost per unit. Total contribution = contribution per unit × units sold. Profit for a period is total contribution minus fixed costs, assuming the stated cost structure and period.
Contribution costing can help with short-run decisions when fixed costs do not change, such as a special order with spare capacity. It has limits: prices, demand and variable costs may change; fixed resources are not truly irrelevant long term; and accepting low-price orders may harm regular sales or customer expectations.
Pause and explain
Price is $18 and variable cost is $11 per unit. What is contribution per unit?
Worked example
A product sells for $25, variable cost is $15 per unit, fixed costs are $6,000 and sales are 800 units. Calculate contribution per unit, total contribution and profit.
Show the worked solution
- Unit contribution = 25−15.
- Total contribution = 10 × 800.
- Profit = total contribution−fixed costs.
Answer Contribution is $10 per unit; total contribution is $8,000; profit is $8,000−$6,000=$2,000.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A firm sells 500 units at $32 each. Variable cost is $19 per unit and fixed costs are $5,000. Calculate total contribution and profit.
Give me a hint
Find unit contribution, multiply by sales and then subtract fixed costs.
Compare my reasoning
- Unit contribution = 32−19.
- Total contribution = 13×500.
- Profit = total contribution−5,000.
Unit contribution is $13. Total contribution is $6,500. Profit is $6,500−$5,000=$1,500.
Look for these in your work
- Unit contribution is correct
- Total contribution is calculated
- Fixed costs are subtracted only for profit
A product costs $24,000 in total production costs for 1,200 units, including allocated fixed overhead. Calculate the simple full cost per unit and state one limitation.
Give me a hint
Divide the total production costs by units produced.
Compare my reasoning
- Full cost per unit = total cost ÷ output.
- Calculate 24,000÷1,200.
- The result depends on how shared overhead was allocated.
Simple full cost per unit is $20. The figure depends on the accuracy and basis of fixed-overhead allocation and does not prove customers will pay a price above $20.
Look for these in your work
- Calculation is correct
- Allocation is recognised
- Cost is not confused with market price
A customer offers a one-off order above variable cost but below full cost. Explain when contribution costing could support accepting it and what must still be checked.
Give me a hint
Check spare capacity and relevant incremental costs, then assess displacement and longer-term effects.
Compare my reasoning
- Positive contribution can help cover fixed costs if capacity is idle.
- Include extra packaging, delivery or setup costs.
- Check whether regular sales, price expectations or capacity are affected.
If spare capacity exists and the order covers its incremental costs, its contribution may add toward fixed costs. The firm should include order-specific costs and check that it does not displace regular sales, disrupt operations or undermine future pricing. A below-full-cost order is not automatically acceptable.
Look for these in your work
- Short-run use is explained
- Relevant costs are considered
- Commercial and long-run risks are evaluated
Common mistakes
- Calling contribution profit
- Treating allocated fixed overhead as a variable cost
- Using contribution for a long-run decision without considering fixed capacity cost
What can you explain now?
How is contribution per unit calculated?
Compare with the explanation
Selling price minus variable cost per unit
It shows what remains per unit to cover fixed costs and then profit.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
How do full cost, unit contribution, total contribution and profit relate, and when can contribution aid a short-run choice?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.