What is Contribution Pricing? Meaning.
Contribution Pricing is a form of cost-plus pricing which
involves separating the different products that make up the product portfolio
and allocating to them the direct costs associated with their production.
The price is determined at a level which will generate revenues in excess
of these costs, thereby contributing towards meeting business overheads. Individual
products can be analyzed in terms of their ability to cover their direct costs
and contribute to overheads.
It is a methodology where the price charged is based on the
variable costs of production. A price is set that is greater than the variable
costs, so that a contribution is made towards recovering the fixed costs.
"Contribution" here means the difference between the price charged and the
variable costs involved in producing a good.
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Compare also: Variable
Costing
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