The contribution margin equation is:
Contribution Margin = Revenue - Variable Costs
In this equation:
- **Contribution Margin** represents the amount of revenue that is available to cover fixed costs and contribute to profit after variable costs have been deducted.
- **Revenue** is the total income generated from sales of products or services.
- **Variable Costs** are costs that vary with the level of production or sales. These costs include expenses directly related to producing or delivering a product or service, such as materials, labor, and variable overhead.
The contribution margin is a key financial metric used in cost-volume-profit analysis to assess the profitability of a product or service and its ability to cover fixed costs and generate profit.