Which of the following is true regarding the contribution margin of a company that produces only...

Which of the following is true regarding the contribution margin of a company that produces only a single product?

a. The contribution margin minus selling and administrative costs equals net operating income.

b. As fixed expenses decrease, the contribution margin increases.

c. The contribution margin equals the sales less the total product costs

d. The contribution margin will decline as the unit sales price declines

Solutions

Expert Solution

The contribution margin or dollar contribution per unit is the selling price per unit minus the variable cost per unit .The contribution represents the portion of sales revenue that is not consumed by the variable cost and so contributes to the coverage of fixed cost.

Formula

Contribution margin = (Sales revenue) -(Variable cost)

Selling and administrative costs are variable costs.So it is already deducted for calculating contribution margin. And contribution margin and net operating income are different terms.That is why option A is incorrect

As fixed expense is a part of contribution margin so any increase or decrease in fixed expense do not affects contribution margin. So option B is also incorret .

As variable cost is a part of total product cost. And the formula of contribution margin is equals to sales revenue less variable cost . It do not includes the total cost. So option C is also incorrect.

Option D is correct as contribution margin declines with decline in sales revenue keeping constant the variable cost.We can easily confirm it by the formula.

ekkarill92 answered 10 months ago

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