The mathematical equation used to determine the contribution margin is ___________?
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Answer: A. revenue – all variable cost
Explanation
Contribution margin is calculated mathematically by subtracting all variable costs from total revenues. It shows the amount of revenue remaining to cover fixed expenses and generate operating profit. Both manufacturing and non-manufacturing variable expenses must be deducted to find the true contribution margin. Contribution margin can be expressed on a total basis, a per-unit basis, or as a percentage ratio. Variable costs fluctuate directly in proportion to changes in sales volume and production activity. This metric is fundamental for performing cost-volume-profit and breakeven analyses in business.
Sales managers review contribution margins to determine which product lines generate the most profit. Pricing decisions rely heavily on knowing the contribution margin to ensure covering variable expenses. Evaluating contribution margins helps businesses decide whether to accept special orders at reduced prices. Revenue plus all variable cost incorrectly adds expenses to sales, resulting in an inflated and illogical figure. Cost plus revenue is a garbled formula that bears no relationship to contribution margin calculations. Revenue minus breakeven units mixes revenue dollars with physical unit counts, violating basic math.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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