Question

What defines the contribution margin? Ignore taxes.

a) Revenues minus variable costs

b) Fixed costs minus variable costs

c) Total costs minus fixed costs

d) Revenues minus total costs

Answer 1

The contribution margin is calculated by subtracting variable costs from revenues. It is important for assessing the profitability of products or services before fixed costs are considered. Contribution margin differs from accounting profit, which also subtracts explicit costs from total revenues.

Step-by-step explanation:

The contribution margin is defined as revenues minus variable costs. This calculation enables businesses to determine the amount of profit made on a product or service before accounting for fixed costs. It is a vital concept in cost accounting and often used in decision-making processes for pricing and product lines.

For example, if a center earns revenues of $10,000 and the variable costs are $15,000, the contribution margin would be negative, suggesting that the center cannot cover even its variable costs with the revenue it generates. In such a case, the center may consider shutting down to prevent further losses.

It is important to distinguish the contribution margin from concepts such as accounting profit, which is total revenues minus explicit costs, and profit, which accounts for both fixed and variable costs. Comparing these different financial metrics helps businesses analyze their financial health more comprehensively.