Chapter 3, Problem 1MC

The amount of a unit’s sales price that helps to cover fixed expenses is its ____________________.

A. contribution margin

B. profit

C. variable cost

D. stepped cost

To determine

Concept introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume and profit of a product. It analyzes the cost and profits at the different level of production to determine the breakeven point and the required level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones. The formula:

Contribution margin = Sales - Variable cost.

Similarly, contribution margin ratio = Contribution/sales

To choose:

The correct term for amount of unit’s sales price that helps to cover fixed expenses.

Answer to Problem 1MC

Option A: Contribution Margin

Explanation of Solution

Explanation for correct answer:

The amount of unit’s sales price that helps to cover fixed cost is Contribution Margin. Hence the correct option is A.

Explanation for incorrect answers:

Option B: The amount of unit’s sales price that helps to cover fixed cost is Contribution Margin. Hence this option is incorrect.

Option C: The amount of unit’s sales price that helps to cover fixed is Contribution Margin. Hence this option is incorrect.

Option D:The amount of unit’s sales price that helps to cover fixed is Contribution Margin. Hence this option is incorrect.