What is defined as the contribution margin?

The contribution margin is defined as the sales revenue remaining after variable costs have been deducted. This metric is crucial for understanding how much revenue is available to cover fixed costs and contribute to profit after accounting for variable expenses directly associated with the production of goods or services.

By calculating the contribution margin, businesses can assess how much each unit sold contributes to fixed costs and ultimately to profit, which provides insights into pricing strategies, cost control, and overall financial performance. This distinction is significant because while total revenue represents the gross amount generated from sales, the contribution margin focuses specifically on the profitability of those sales once variable costs are taken into account.

Understanding this helps businesses make informed decisions about product pricing, special orders, and assessing the profitability of individual products or services.