What is the definition of contribution margin?

The contribution margin is defined as the difference between marginal revenue and marginal cost. This concept is central to understanding how much revenue is available to cover fixed costs and generate profit after accounting for variable costs associated with production or sales.

When a business analyzes its contribution margin, it focuses on how much each unit sold contributes to covering fixed costs and generating profit after accounting for variable costs. A higher contribution margin indicates that a company retains more of its revenue after variable costs are deducted, which is essential for financial health, especially in scenarios where sales volume is increasing.

The other definitions provided do not accurately capture the essence of contribution margin. The difference between marginal revenue and the break-even point refers to a concept related to profitability but does not constitute the contribution margin. The point where marginal revenue equals marginal cost pertains to optimal production levels but does not define contribution margin itself. Lastly, the idea of fixed costs producing profit is more related to overall business profitability rather than the specific calculation of contribution margin.

Understanding these distinctions illustrates why the correct definition focuses specifically on the relationship between marginal revenue and marginal cost, highlighting its importance in financial decision-making.