Contribution Margin Basics

Steps:

• Define contribution as the portion of sales revenue that covers fixed costs and generates profit after variable costs.
• Identify variable costs as those that vary directly with production volume.
• Recognize marginal cost as the additional cost of producing one more unit, which equals variable cost per unit.
• Apply the formula: contribution = sales revenue - variable (marginal) costs.

Why C is correct:

• Contribution is defined in marginal costing as sales revenue minus marginal (variable) costs, per standard accounting formulas.

Why the others are wrong:

• A subtracts fixed costs, ignoring variable costs and overstating contribution.
• B uses absorption cost, which includes fixed overheads, not isolating variable costs.
• D subtracts total costs (fixed + variable), leaving zero or negative, not true contribution.

Final answer: C