Final answer:
Tje correct answer is option c. The contribution margin covers fixed cost and profit after variable expenses are deducted from sales revenue. It is crucial for calculating profitability and making informed business decisions.
Step-by-step explanation:
The question revolves around the concept of the contribution margin, which is a critical term in managerial accounting and cost accounting. The contribution margin represents the amount of revenue from sales that exceeds the variable costs of production, and it is calculated by subtracting the variable expenses from the sales revenue. The correct option for the definition of contribution margin is that it covers fixed cost and profit (option c). This means that once the variable costs are covered by the sales revenue, the remaining contribution margin is used to first cover fixed costs, and whatever is left contributes to the firm's profit.
Understanding the contribution margin is essential for determining the break-even point and for making decisions about pricing, product lines, and cost control. It is a vital performance metric because it helps management evaluate the profitability of products or services.
It is important to distinguish between different types of costs and profits such as average profit, average total cost, and average variable cost. These concepts are fundamental to understanding how firms operate and make financial decisions.