Multiple Choice
Which of the following best describes how net sales are calculated on the income statement?
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4. Merchandising Operations
Net Sales
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Contribution margin is the excess of:
A
Net sales over variable costs
B
Net sales over operating expenses
C
Net sales over fixed costs
D
Net sales over total costs
Verified step by step guidance1
Understand the concept of contribution margin: Contribution margin is the amount remaining after deducting variable costs from net sales. It is used to cover fixed costs and contribute to profit.
Identify the components of the formula: Contribution margin = Net Sales - Variable Costs. Here, 'Net Sales' refers to the revenue generated from selling goods or services, and 'Variable Costs' are costs that change with the level of production or sales.
Analyze the options provided: The correct answer should align with the definition of contribution margin, which focuses on the relationship between net sales and variable costs.
Eliminate incorrect options: Review each option and eliminate those that mention fixed costs, operating expenses, or total costs, as these are not part of the contribution margin calculation.
Select the correct answer: Based on the definition and formula, the correct answer is 'Net sales over variable costs.' This matches the concept of contribution margin.
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