Answer :
Contribution margin is a business' sales revenue less its variable costs.
Contribution margin is a cost-accounting formula that calculates the revenue that is still available after covering fixed costs in order to assess a product's profitability.
What does the term "contribution margin" refer to?
The money that remains from sales after all variable costs related to creating a product have been paid is the contribution margin, also known as the gross margin, for a business. Your net income, or profit, is obtained by deducting fixed expenses like rent, equipment leases, and wages from your contribution margin.
How is the contribution margin determined?
Revenue - Variable Costs is the formula for calculating contribution margin. (Revenue - Variable Costs) / Revenue is the formula for calculating the contribution margin ratio.
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Final answer:
Contribution Margin is the Sales Revenue minus the Variable costs, capturing the profitability for each item sold. It is a critical measure in understanding product pricing and optimal production levels.
Explanation:
The Contribution Margin is defined as the Sales Revenue minus the Variable Costs. It is a measure of the profitability for individual items that a company makes and sells. Specifically, it is used to review the variable costs included in the production cost of an individual item.
In other words, it is used to analyze the margin contribution of each unit sold to the overall business profit. Understanding this concept is crucial for the firm to determine pricing and the optimal level of production, among others.
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