Question

As long as the selling price is greater than the _______________ cost per unit, some contribution can be made to cover the ________________?

1) fixed, variable costs
2) variable, fixed costs
3) total, expenses
4) fixed, negative cash flow

Answer 1

As long as the selling price is greater than the variable cost per unit, some contribution can be made to cover the fixed costs. As fixed costs are sunk and variable costs change with production levels. Option 2.

Step-by-step explanation:

As long as the selling price is greater than the variable cost per unit, some contribution can be made to cover the fixed costs.

In the short-run, firms incur fixed costs before any output is produced and these are considered sunk costs since they are in the past and cannot be altered by current or future actions.

On the other hand, variable costs are incurred during the production process and tend to increase with the level of output due to diminishing marginal returns.

A firm's ability to contribute to fixed costs and ultimately achieve profitability greatly depends on its capacity to cover variable costs with the revenue generated from sales.

Hence, the right answer is option 2.