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Variable costs are costs that varies with the production.
Contribution margin measures the weight various items have on the overall performance of the business. Let’s say a haulage firm was running a set of long-haul trucks. Total sales would in this instance would be the payment received from its customers for bringing goods from A to B.
Total variable costs would be fuel, toll, maitenance and in some circumstances payment to the driver.
As long as the driver drives as economically as is possible then the contribution margin would be positive, since sales are greater than variable costs.
The contribution margin is the foundation for break-even analysis used in the overall cost and sales price planning for products. The contribution margin helps to separate out the fixed cost and profit components coming from product sales and can be used to determine the selling price range of a product, the profit levels that can be expected from the sales, and structure sales commissions paid to sales team members, distributors or commission agents.
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