What is the definition of Contribution Margin?

Contribution margin is defined as the amount by which a product's sales exceed its variable costs. It represents the portion of sales revenue that contributes to covering fixed costs after accounting for variable costs.

By focusing on total sales and variable expenses, this definition allows businesses to understand how much revenue is available to cover fixed costs and generate profit. The contribution margin is critical in decision-making related to pricing, product mix, and profitability analysis.

This understanding is pivotal for assessing the financial health of a business and determining how many units need to be sold to break even or to achieve desired profit levels. Managers use contribution margin to analyze the impact of sales volume on profitability, which is why it’s a key metric in financial assessment and strategic planning.