How is the contribution margin calculated?

The contribution margin is calculated by subtracting the variable cost per unit from the sales price per unit. This metric indicates how much revenue from sales contributes to covering fixed costs and generating profit after accounting for variable costs. By isolating the contribution margin, businesses can better understand how changes in sales volume, costs, and pricing strategies affect overall profitability. It highlights the portion of sales revenue that remains after covering the variable costs associated with producing goods or services, which is crucial for decision-making about pricing, product selection, and resource allocation. Understanding the contribution margin helps management make informed financial and operational decisions, ensuring sustainable business growth.