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Contribution is revenue the variable costs. right?
here is a question:
petra is thinking of buying a machine for 275000. it will produce 50000 units per year for 5 years. sale price will be 10/unit and variable costs willbe 6/unit. incremental fixed costs will be 70000 per year and 25000 per year for selling and distribution. cost of capital is 10%.
by how many units must the estimate of production/sale fall for the project to be regarded as not worthwhile?
i only took the variable costs into consideration where the answer took the fixed casts as well.
why?thanks
Contribution is revenue less variable costs.
However, when we are calculating the net cash flows for NPV calculations we need to bring in all cash flows that result from doing the project – not simply the contribution.
If there are incremental (which means extra) fixed costs then there is an extra cash flow and that must be brought in.
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