Contribution Margin

Contribution margin is a key metric that tells a business how much money each sale contributes to covering its fixed costs and profit. It’s calculated by subtracting variable costs (expenses that change with sales volume) from sales revenue. This leftover amount essentially contributes to paying for fixed costs (expenses that stay the same regardless of sales) like rent and salaries. Businesses use contribution margins to measure profitability, make pricing decisions, and perform break-even analysis.

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