What do you understand by contribution. How is it related to profit
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The difference between sales value and marginal cost of those sales is known as contribution.
If selling price of a product is Rs. 10 and its variable cost is Rs. 5, there is a contribution of Rs. 5.
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This Rs. 5 is, of course, not profit, since the fixed costs remain unpaid. Thus, contribution will first go to meet fixed expenses and the balance represents the profits of the undertaking. Therefore, contribution may be said to be equal to fixed cost and profit (or loss).
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