When we went on tour - Contribution and Break Even

I've just returned from a busy week delivering the tutor2u BUSS1 revision conferences (along with many others) and I am looking forward to next week when we visit Newcastle and Leeds. However, I thought I would quickly blog about a topic that we covered on the conferences that students seem to find confusing. Contribution.Contribution is (in my opinion) one of the most important topics to grasp in business studies and one which many students confuse with profit. One of the activities during the finance section of the revision conference asks students to find the connection between price and break even. All students were able to explain that if a firm increased the price then this could reduce the break even point. However, far fewer students were able to relate this to contribution. To illustrate this, I borrowed a students mobile phone and explained to the audience that I have just setup a shop that sells mobile phones. If I buy a mobile phone from my suppliers for £100 and sell it for £200, how much profit have I made? A number of students said £100. However, this £100 isnt profit. It is contribution. This £100 merely contributes towards paying off my fixed costs. Once my fixed costs have been met, then this £100 contributes towards my profit.When students answer questions on break even, especially ways to reduce the break even point, they can develop far stronger lines of argument by using contribution in their answer. For example, raising the price of the product will increase contribution per unit. Therefore, fewer products need to be sold to cover the fixed costs meaning that the break even point reduces. This is a far, far better response than merely saying, raising the price reduces the break even point.