What does the contribution margin indicate?

The contribution margin is a key financial metric that reflects the amount of revenue remaining after subtracting variable costs associated with producing and selling a product. It indicates how much money is available to cover fixed costs and contribute to profit once all variable expenses are accounted for. Essentially, it provides insight into how much each unit sold contributes to fixed costs and potential profit. This makes it crucial for assessing the profitability of individual products or the overall business performance when analyzing costs and pricing strategies.

Understanding the contribution margin helps businesses make informed decisions about pricing, production levels, and the introduction of new products, as it visually represents the effect of variable costs on profitability.