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Definition of Contribution

Contribution Image 1


Also the difference between the selling price and variable costs, which can be expressed either per
unit or in total.

Related Terms:

Contribution margin

The difference between variable revenue and variable cost.

contribution margin

An intermediate measure of profit equal to sales revenue
minus cost-of-goods-sold expense and minus variable operating
expenses—but before fixed operating expenses are deducted. Profit at
this point contributes toward covering fixed operating expenses and
toward interest and income tax expenses. The breakeven point is the
sales volume at which contribution margin just equals total fixed

contribution margin

the difference between selling price and
variable cost per unit or in total for the level of activity; it
indicates the amount of each revenue dollar remaining
after variable costs have been covered and going toward
the coverage of fixed costs and the generation of profits

Contribution margin

The margin that results when variable production costs are subtracted
from revenue. It is most useful for making incremental pricing decisions
where a company must cover its variable costs, though perhaps not all of its fixed

contribution margin ratio

the proportion of each revenue dollar remaining after variable costs have been covered;
computed as contribution margin divided by sales

Contribution Principle

This is the principle which specifies the factors that must be taken into account when calculating dividends. At Canada Life, the key factors are: interest earnings, mortality, and operating expense.

Contribution Rate

The percentage tax charged by a state to an employer to
cover its share of the state unemployment insurance fund.

Contribution Image 2

Defined contribution plan

A pension plan in which the sponsor is responsible only for making specified
contributions into the plan on behalf of qualifying participants. Related: defined benefit plan
Delayed issuance pool Refers to MBSs that at the time of issuance were collateralized by seasoned loans
originated prior to the MBS pool issue date.

Defined Contribution Plan

A qualified retirement plan under which the employer
is liable for a payment into the plan of a specific size, but not for the size
of the resulting payments from the plan to participants.

Equity contribution agreement

An agreement to contribute equity to a project under certain specified

Federal Insurance Contributions Act of 1935 (FICA)

A federal Act authorizing the government to collect Social Security and Medicare payroll taxes.

product contribution margin

the difference between selling price and variable cost of goods sold

Self-Employment Contributions Act (SECA)

A federal Act requiring self-employed business owners to pay the same total tax rates for Social Security and
Medicare taxes that are split between employees and employers under the Federal Insurance contributions Act.

Throughput contribution

Sales revenue less the cost of materials.

total contribution margin

see contribution margin

Benefit Ratio Method

The proportion of unemployment benefits paid to a company’s
former employees during the measurement period, divided by the total
payroll during the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.

Benefit Wage Ratio Method

The proportion of total taxable wages for laid off
employees during the measurement period divided by the total payroll during
the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.

breakeven point

The annual sales volume level at which total contribution
margin equals total annual fixed expenses. The breakeven point is only a
point of reference, not the goal of a business, of course. It is computed by
dividing total fixed expenses by unit margin. The breakeven point is
quite useful in analyzing profit behavior and operating leverage. Also, it
gives manager a good point of reference for setting sales goals and
understanding the consequences of incurring fixed costs for a period.

Country selection

A type of active international management that measures the contribution to performance
attributable to investing in the better-performing stock markets of the world.

Defined benefit plan

A pension plan in which the sponsor agrees to make specified dollar payments to
qualifying employees. The pension obligations are effectively the debt obligation of the plan sponsor.
Related: defined contribution plan

degree of operating leverage

a factor that indicates how a percentage change in sales, from the existing or current
level, will affect company profits; it is calculated as contribution
margin divided by net income; it is equal to (1 - margin of safety percentage)

earned income

Earned income is generally an individual's salary or wages from employment. It also includes some taxable benefits. Earned income also includes business income if the individual is self-employed. Earned income is used as the basis for calculating RRSP maximum contribution limits.

Employee Stock Ownership Plan (ESOP)

A fund containing company stock and owned by employees, paid for by ongoing contributions by the employer.


The acronym for the Federal Insurance contributions Act, also used to describe
the combined amount of Social Security and Medicare deductions from
an employee’s pay.

Financial Assistance

Economic assistance provided by unrelated third parties, typically government agencies. They may take the form of loans, loan guarantees, subsidies, tax allowances, contributions, or cost-sharing arrangements.

IRA/Keogh accounts

Special accounts where you can save and invest, and the taxes are deferred until money
is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of
contributions. Withdrawals of tax deferred contributions are taxed as income, including the capital gains from
such accounts.

Labour oncost

The non-salary or wage costs that follow from the payment of salaries or wages, e.g. National
Insurance and pension contributions.

Leverage ratios

Measures of the relative contribution of stockholders and creditors, and of the firm's ability
to pay financing charges. Value of firm's debt to the total value of the firm.

Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and
the firm contributes at the same or a different rate. Also called and individual account plan.

Official unrequited transfers

Include a variety of subsidies, military aid, voluntary cancellation of debt,
contributions to international organizations, indemnities imposed under peace treaties, technical assistance,
taxes, fines, etc.

Owners' equity

The total of all capital contributions and retained earnings on a business’s
balance sheet.

Payroll Stabilization

This calculation is used by states to determine the unemployment
contribution rate to charge employers and links the contribution rate
to fluctuations in a company’s total payroll over time.

Planned amortization class CMO

1) One class of CMO that carries the most stable cash flows and the
lowest prepayement risk of any class of CMO. Because of that stable cash flow, it is considered the least risky CMO.
2) A CMO bond class that stipulates cash-flow contributions to a sinking fund. With the PAC,
principal payments are directed to the sinking fund on a priority basis in accordance with a predetermined
payment schedule, with prior claim to the cash flows before other CMO classes. Similarly, cash flows
received by the trust in excess of the sinking fund requirement are also allocated to other bond classes. The
prepayment experience of the PAC is therefore very stable over a wide range of prepayment experience.

Private unrequited transfers

Refers to resident immigrant workers' remittances to their country of origin as
well as gifts, dowries, inheritances, prizes, charitable contributions, etc.


The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.

profit module

This concept refers to a separate source of revenue and
profit within a business organization, which should be identified for
management analysis and control. A profit module may focus on one
product or a cluster of products. Profit in this context is not the final, bottom-
line net income of the business as a whole. Rather, other measures
of profit are used for management analysis and decision-making purposes—
such as gross margin, contribution margin, or operating profit
(earnings before interest and income tax).

Profit Sharing Plan

A retirement plan generally funded by a percentage of company
profits, but into which contributions can be made in the absence of profits.

Qualified Retirement Plan

A retirement plan designed to observe all of the requirements
of the Retirement Income Security Act (ERISA), which allows an
employer to immediately deduct allowable contributions to the plan on behalf
of plan participants.

Registered Pension Plan

Commonly referred to as an RPP this is a tax sheltered employee group plan approved by Federal and Provincial governments allowing employees to have deductions made directly from their wages by their employer with a resulting reduction of income taxes at source. These plans are easy to implement but difficult to dissolve should the group have a change of heart. Employer contributions are usually a percentage of the employee's salary, typically from 3% to 5%, with a maximum of the lessor of 20% or $3,500 per annum. The employee has the same right of contribution. Vesting is generally set at 2 years, which means that the employee has right of ownership of both his/her and his/her employers contributions to the plan after 2 years. It also means that all contributions are locked in after 2 years and cannot be cashed in for use by the employee in a low income year. Should the employee change jobs, these funds can only be transferred to the RPP of a new employer or the funds can be transferred to an individual RRSP (or any number of RRSPs) but in either scenario, the funds are locked in and cannot be accessed until at least age 60. The only choices available to access locked in RPP funds after age 60 are the conversion to a Life Income Fund or a Unisex Annuity.
To further define an RPP, Registered Pension Plans take two forms; Defined Benefit or Defined contribution (also known as money purchase plans). The Defined Benefit plan establishes the amount of money in advance that is to be paid out at retirement based usually on number of years of employee service and various formulae involving percentages of average employee earnings. The Defined Benefit plan is subject to constant government scrutiny to make certain that sufficient contributions are being made to provide for the predetermined pension payout. On the other hand, the Defined contribution plan is considerably easier to manage. The employer simply determines the percentage to be contributed within the prescribed limits. Whatever amount has grown in the employee's reserve by retirement determines how much the pension payout will be by virtue of the amount of LIF or Annuity payout it will purchase.
The most simple group RRSP plan is a group billed RRSP. This means that each employee has his own RRSP plan and the employer deducts the contributions directly from the employee's wages and sends them directly to the RRSP plan administrator. Regular RRSP rules apply in that maximum contribution in the current year is the lessor of 18% or $13,500. Generally, to encourage this kind of plan, the employer also agrees to make a regular contribution to the employee's plans, knowing full well that any contributions made immediately belong to the employee. Should the employee change jobs, he/she can take their plan with them and continue making contributions or cash it in and pay tax in the year in which the money is taken into income.

Registered Retirement Savings Plan (Canada)

Commonly referred to as an RRSP, this is a tax sheltered and tax deferred savings plan recognized by the Federal and Provincial tax authorities, whereby deposits are fully tax deductable in the year of deposit and fully taxable in the year of receipt. The ability to defer taxes on RRSP earnings allows one to save much faster than is ordinarily possible. The new rules which apply to RRSP's are that the holder of such a plan must convert it into income by the end of the year in which the holder turns age 69. The choices for conversion are to simply cash it in an pay full tax in the year of receipt, convert it to a RRIF and take a varying stream of income, paying tax on the amount received annually until the income is exhausted, or converting it into an annuity with guaranteed payments for a chosen number of years, again paying tax each year on moneys received.
If you are currently 69 years of age, you may still contribute to your own RRSP until December 31st of this year and realize a tax deduction on this year's income. You must also, however, make provisions before December 31st of the year for converting your RRSP into either a RRIF or an annuity, otherwise, the full balance of your RRSP becomes taxable on January 1 of the following year. If you are older than age 69, still have earned income, and have a younger spouse, you may continue to contribute to a spousal RRSP until that spouse reaches 69 years of age. contributions would be based on your own contribution level and are deducted from your taxable income.

Reserve Ratio

This calculation is used by states to determine the unemployment contribution rate to charge employers. The ongoing balance of a firm’s unclaimed
contributions from previous years is reduced by unemployment claims for the past year and then divided by the average annual payroll, resulting in a "reserve ratio".

Seed Financing/Capital

Generally, refers to the first contribution of capital toward the financing requirements of a start-up business.

spousal RRSP (Canada)

The RRSP rules allow you to contribute to an RRSP for your spouse and claim the deduction yourself. Your total contribution (to your own and your spouse's plan) is still subject to your normal contribution limits, minus any personal pension adjustment and any past service pension adjustment, plus any unused contribution room from prior years and any pension adjustment reversal. Generally, the advantage is that your spouse will ultimately be the one who reports the income for tax purposes when the funds are withdrawn on retirement or otherwise (certain restrictions apply). If your spouse will have a lower income than you when the funds are withdrawn, significantly lower taxes may be payable on the withdrawn amount.

Target Benefit Plan

A defined benefit plan under which the employer makes
annual contributions into the plan based on the actuarial assumption at that time
regarding the amount of funding needed to achieve a targeted benefit level.

Tax-deferred retirement plans

Employer-sponsored and other plans that allow contributions and earnings to
be made and accumulate tax-free until they are paid out as benefits.

Unemployment Insurance

A program in which workers and firms pay contributions and workers collect benefits if they become unemployed.

variable cost ratio

the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)







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