Explain the concept of 'contribution margin.'

The concept of 'contribution margin' refers specifically to the profit that remains from sales after all variable costs have been deducted. This measure is crucial for understanding how much revenue contributes to covering fixed costs and generating profit once the variable costs associated with producing goods or services have been accounted for.

By focusing on the contribution margin, businesses can make informed decisions regarding pricing, cost control, and product selection. It allows for a clear analysis of the profitability of individual products, enabling companies to identify which items contribute most to overall profitability and which may need strategic adjustments, such as cost reduction or price changes.

This distinction highlights the role of variable costs in the revenue-generating process. Understanding contribution margin is essential for managerial decision-making, budgeting, and forecasting, as it directly impacts a company's ability to absorb fixed costs and achieve profitability.