A company can utilize its contribution margin primarily to cover fixed costs and generate profit because the contribution margin is the amount remaining from sales revenue after variable costs have been subtracted. This remaining amount is critical for covering fixed costs, which do not change with the level of production or sales volume, and any excess after covering these fixed costs contributes to profit.
Understanding the contribution margin is essential for assessing the financial performance of the business because it helps determine how much revenue is available to contribute toward covering those fixed costs. Once fixed costs are covered, any remaining contribution margin can be considered profit. This concept is fundamental in cost-volume-profit analysis, which enables companies to make informed decisions about pricing, production levels, and overall financial strategy.
While utilizing the contribution margin for funding employee bonuses might occur in practice, it is not the primary purpose or focus—it fundamentally serves as a tool to manage costs and profitability. Paying for variable costs only does not capture the complete picture, as the contribution margin is calculated after variable costs are deducted. As for calculating sales tax, that does not relate to the notion of contribution margin or its utilization in operational strategy. Thus, the relevance and primary utilization of the contribution margin lies squarely in addressing fixed costs and contributing to overall profitability.