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A company with £100,000 of sales revenue generates a contribution of £12,000.
Variable costs is therefore the difference (=£88,000).
But after that sales revenue will experience a 5% increase in its value which will lead to an increase of 5% also in contribution.How come?
Can you please explain to me the reasoning behind it?Thanks.
The only way in which an increase in sales revenue of 5% gives rise to an increase in contribution of 5% is if the sale volume increases by 5%.
If sales volume increases by 5% then both sales revenue and variable costs will increase by 5%, in which case the contribution will increase by 5%.
(If the sales price increases by 5%, then sales revenue will increase by 5% but the contribution will increase by more than 5%)
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