What is meant by contribution? How is it important in determining profitability?

Contribution is the amount of earnings remaining after all direct costs have been subtracted from revenue. This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs equals the profit earned.

Direct costs are any costs that vary directly with revenues, such as the cost of materials and commissions. For example, if a business has revenues of $1,000 and direct costs of $800, then it has a residual amount of $200 that can be contributed to the payment of fixed costs. This $200 amount is the contribution arising from operations.

The contribution concept is usually referred to as contribution margin, which is _________ ______ _____ _________ ________ _________ ____ ___ ______ ___ ______.
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