What method calculates contribution margin
variable costing
The contribution margin is calculated by subtracting variable costs from total sales revenue. The formula for calculating contribution margin is as follows:
Contribution margin = Total sales revenue – Total variable costs
In this formula, total sales revenue refers to the total amount of money that a company earns from the sale of its products or services. Total variable costs include all of the costs that vary with changes in the level of sales. These costs may include the cost of materials, direct labor costs, and other costs that are directly related to the production of products or services.
The contribution margin is an important financial metric that allows a company to determine the profitability of its products or services. By subtracting variable costs from sales revenue, companies can determine how much revenue is available to cover fixed costs and contribute to profit. This information is essential for making strategic decisions about pricing, product mix, and cost management.
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