How is the contribution margin calculated?

The contribution margin is the difference between sales revenue and variable costs. This metric is essential for understanding how much money is available to cover fixed costs and generate profit after accounting for the variable costs associated with producing a product or service.

When sales revenue is greater than variable costs, the contribution margin indicates the portion of sales that contributes to covering fixed costs and providing profit. It allows managers to make decisions regarding pricing, cost control, and product selection since it highlights which products contribute most effectively to overall profitability.

In contrast, the other methods described do not directly provide the necessary calculations to determine the contribution margin, as they either mix concepts or misinterpret the relationships between revenue and costs.