How is the contribution margin calculated?

The contribution margin is calculated by subtracting total variable costs from sales revenue. This measure indicates how much revenue is available to cover fixed costs and contribute to profit after accounting for the variable costs associated with producing goods or services. By focusing on the difference between sales and the variable costs, the contribution margin provides insights on the impact of sales volume on profitability.

This calculation is critical for businesses as it helps in understanding how much money is left over to pay fixed costs and generate profits, which aids in decision-making related to pricing and production levels.