Contribution margin is the excess of sales revenue over variable costs. Thus, contribution margin is the balance of the sales revenue left after recovering variable expenses and thus is available to recover fixed expenses and to realize profits for the period. Therefore contribution margin is used first to cover the fixed expenses, and then whatever remains after the fixed expenses recovery goes towards profits. If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period.
Contribution Margin = Net Sales Revenue - Variable Costs
Total contribution margin is the total sales revenue less total variable costs. It is called contribution margin because whatever is left after covering the variable costs contributes to pay for fixed costs and to earn profit. If the contribution margin is not sufficient to cover the fixed costs, then the firm suffers from a loss.
Contribution margin per unit (CMPU) is the selling price per unit less(SPPU) less variable costs per unit(VCPU)
Therefore, CMPU= SPPU- VCPU
