Question

The dollar amount that provides for covering fixed costs and then provides for operating income is called ________.

A) variable cost
B) total cost
C) contribution margin
D) margin of safety

Answer 1

The contribution margin is the dollar amount that covers fixed costs and generates operating income. It is calculated after variable costs are subtracted from sales revenue.

Step-by-step explanation:

The dollar amount that provides for covering fixed costs and then provides for operating income is called the contribution margin. This is the amount of revenue from sales that exceeds the variable costs of production, and it contributes to covering the fixed costs and providing operating income.

Using the example of the barber shop called "The Clip Joint", we can determine that with fixed costs at $160 per day and variable costs at $80 per barber, the total costs will vary based on the quantity of labor hired. For instance, employing two barbers would result in total costs of $320 ($160 in fixed costs plus $160 in variable costs).