What is contribution margin?

The contribution margin is defined as the difference between sales revenue and variable costs. This measurement is crucial in management accounting as it indicates how much money is available to cover fixed costs and contribute to profit after variable costs have been deducted. Essentially, the contribution margin shows how revenue generated from sales contributes to covering the fixed costs of the business.

This concept is central to understanding pricing strategies, cost control, and overall profitability. By focusing on the contribution margin, businesses can make informed decisions on production levels, pricing, and the impact of variable costs on profits.

Understanding this concept helps managers analyze how changes in sales volume, variable costs, or pricing affect overall profitability. Thus, the contribution margin serves as a vital tool in performance analysis and strategic planning.