What is the contribution margin?

The contribution margin is defined as the excess of sales revenue over variable expenses. This metric is crucial in understanding how much revenue is available to cover fixed costs and contribute to profit after accounting for variable costs. Contribution margin provides insights into the profitability of individual products and helps businesses make decisions regarding pricing, production levels, and sales strategies.

By focusing on the difference between sales revenue and variable expenses, businesses can better evaluate how much each unit sold contributes to covering fixed costs and generating profit. This analysis is especially important in assessing the financial viability of various products or services, allowing businesses to allocate resources effectively and identify key areas for improvement.

The other options do not accurately capture the essence of contribution margin. Total revenue minus all expenses would give net income, which includes both fixed and variable costs. Fixed costs incurred in production only represent one part of the overall cost structure and do not account for variable costs, and total cost of goods sold refers to all costs associated with producing goods, including both fixed and variable components, rather than isolating the contribution made by sales revenues after variable costs are deducted. Thus, the focus on variable expenses in calculating the contribution margin makes choice B the most accurate definition.