Final answer:
Total contribution margin is found by subtracting variable costs from total revenues. It represents the income available after variable costs to cover fixed costs and contribute to profits. Correctly calculating contribution margin is vital for business’s financial planning and strategic decisions.
Step-by-step explanation:
The total contribution margin is calculated by subtracting variable costs from total revenues. This margin reflects the amount of revenue available to cover fixed costs and contribute to profit after all variable costs have been paid. It is an important metric in cost accounting that helps firms understand their profit at different levels of production and sales.
For instance, if a firm's total revenues are $1,000,000 and the variable costs are $600,000, the contribution margin is $400,000. This $400,000 can then be used to pay fixed costs, with whatever remains contributing to the firm's profit.
It's important to differentiate between accounting profit and economic profit. Accounting profit is total revenues minus explicit costs, which includes depreciation, but does not include implicit costs. Economic profit, on the other hand, subtracts both explicit and implicit costs from total revenues. Knowing how to calculate and interpret the contribution margin can be critical for a business in making strategic decisions such as pricing, budgeting, and planning for growth.