What does contribution margin represent?

The term contribution margin specifically indicates the amount remaining from sales revenues after all variable expenses have been subtracted. It is a crucial figure in cost-volume-profit analysis and represents how much revenue contributes to covering fixed costs after all variable costs are accounted for.

Understanding contribution margin allows businesses to evaluate how sales affect their profitability. For instance, a higher contribution margin indicates that a company has more revenue available to cover fixed costs and contribute to profits. This metric helps in making decisions about pricing, budgeting, and assessing the overall financial health of a business.

The other options focus on various aspects of cost accounting but do not accurately describe contribution margin. Total fixed costs, for example, do not take variable costs into account, and profit margins on direct labor or the total sale price minus direct material costs are not relevant in defining contribution margin.