Chapter 7, Problem 1QC

To determine

To identify: The correct option from the given statements.

Answer to Problem 1QC

Option d. The contribution margin is sales revenue minus variable expenses.

Explanation of Solution

Contribution Margin:

Contribution margin is the excess of sales revenue after deducting variable expenses from the amount. What remains after deducting variable expenses from sales revenue, will be contributed to cover fixed costs and operating incomes.

1. a. Sales revenue minus cost of goods sold is the incorrect option because costs of goods sold when deducted from sales revenue gross profit will be derived and not the contribution margin.
2. b. Sales revenue minus fixed expense is the incorrect option as sales revenue’s remaining amount after deducting variable expenses will be contributed to cover fixed costs.
3. c. Sales revenue minus operating expenses is the incorrect option because sales revenue once adjusted for cost of goods sold gross profit is derived and after deducting operating expenses from gross profit, net operating income will be derived. Contribution margin cannot be calculated by subtracting operating expenses from sales revenue.
4. d. Sales revenue minus variable expenses is the correct option as contribution margin refers to the contribution available from the sales revenue after deducting variable costs to be covered for fixed costs and operating income.