Multiple Choice
Which of the following is NOT true regarding a sales discount when calculating net sales?
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4. Merchandising Operations
Net Sales
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The contribution margin equals sales minus all:
A
variable costs
B
fixed costs
C
cost of goods sold and administrative expenses
D
operating expenses
Verified step by step guidance1
Understand the concept of contribution margin: Contribution margin is the amount remaining after deducting variable costs from sales revenue. It is used to cover fixed costs and contribute to profit.
Identify the components of the formula: Contribution margin = Sales - Variable Costs. Fixed costs, cost of goods sold, administrative expenses, and operating expenses are not included in this calculation.
Clarify the role of variable costs: Variable costs are expenses that change directly with the level of production or sales, such as raw materials and direct labor.
Distinguish between variable costs and fixed costs: Fixed costs remain constant regardless of production levels, while variable costs fluctuate with activity levels. Contribution margin focuses only on variable costs.
Apply the formula conceptually: To calculate the contribution margin, subtract all variable costs from the total sales revenue. This provides the amount available to cover fixed costs and generate profit.
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