A profitability metric that measures the revenue remaining after variable costs are subtracted, representing the amount each unit sold contributes to covering fixed costs and generating profit. It's calculated as (Revenue - Variable Costs) / Revenue.
'Contribution' from Latin 'contribuere' meaning to bring together, 'margin' from Latin 'margo.' The concept emerged in 1930s cost accounting as manufacturers needed better tools to understand how individual products contributed to overall profitability and fixed cost coverage.
Contribution margin is the secret weapon of pricing strategy - it shows exactly how much each sale helps pay the rent! Once you cover all fixed costs, every additional sale at the same contribution margin drops straight to the bottom line, which is why businesses often offer steep discounts near month-end.
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