Contribution margin is what remains from revenue after variable costs, the portion of each dollar of sales that contributes to covering fixed costs and generating profit.

Gross margin includes fixed costs in the cost of goods sold. Contribution margin removes them entirely, isolating only the costs that change with activity. What remains reveals the true economics of each product, service line, or customer segment, independent of how overhead is allocated.

The practical consequence: a business with positive gross margin overall can have service lines with contribution margins too thin to cover the overhead they consume. That cross-subsidy continues when management only tracks blended gross margin. Contribution margin by segment surfaces this, and it is also the lens buyers apply to understand which parts of the business are worth retaining.

Understanding which revenue is worth generating is a CFO-level question financials should answer. See how Wefinx approaches Virtual CFO services.

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