Multiple Choice
Which of the following is a major expense associated with home ownership?
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4. Merchandising Operations
Net Sales
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The contribution margin is determined by subtracting which of the following from net sales?
A
Fixed costs
B
Cost of goods sold and operating expenses
C
Variable costs
D
Operating expenses
Verified step by step guidance1
Understand the concept of contribution margin: Contribution margin is the amount remaining from net sales after deducting variable costs. It is used to cover fixed costs and contribute to profit.
Identify the components involved: Net sales represent the total revenue generated from sales, and variable costs are expenses that change directly with the level of production or sales (e.g., raw materials, direct labor).
Recognize the formula for contribution margin: Contribution margin = Net Sales - Variable Costs. This formula highlights the relationship between sales revenue and variable costs.
Clarify why fixed costs, cost of goods sold, and operating expenses are not subtracted: Fixed costs remain constant regardless of production levels, and operating expenses may include both fixed and variable components. Contribution margin specifically focuses on variable costs.
Apply the formula conceptually: To determine the contribution margin, subtract the total variable costs from net sales. This calculation provides insight into how much revenue is available to cover fixed costs and generate profit.
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