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In cost-volume-profit (CVP) analysis, what does the contribution margin represen

Practice Questions

Q1
In cost-volume-profit (CVP) analysis, what does the contribution margin represent?
  1. Total sales revenue
  2. Total fixed costs
  3. Sales revenue minus variable costs
  4. Net profit

Questions & Step-by-Step Solutions

In cost-volume-profit (CVP) analysis, what does the contribution margin represent?
  • Step 1: Understand that the contribution margin is a financial metric used in cost-volume-profit analysis.
  • Step 2: Know that it shows how much money is available to cover fixed costs and generate profit after covering variable costs.
  • Step 3: Identify the formula for calculating the contribution margin: Contribution Margin = Sales Revenue - Variable Costs.
  • Step 4: Recognize that sales revenue is the total money earned from selling products or services.
  • Step 5: Understand that variable costs are the costs that change with the level of production or sales, like materials and labor.
  • Step 6: Calculate the contribution margin by subtracting the total variable costs from the total sales revenue.
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