Question

Contribution =

• A. Sales less Fixed Cost
• B. Sales less Variable Cost
• C. Sales less Total Cost
• D. None of these

Hint:

Remember that contribution is key to break-even analysis. The break-even point in units is calculated as: \(\frac{\text{Fixed Costs}}{\text{Contribution per unit}}\).

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks for the correct formula to calculate 'Contribution' in the context of cost accounting and management.
Step 2: Key Formula:
Contribution is a core concept in marginal costing. It represents the amount of revenue that contributes towards covering the fixed costs of a business and then generating a profit. The formula is:
\[ \text{Contribution} = \text{Sales Revenue} - \text{Variable Costs} \] Step 3: Detailed Explanation:
Let's analyze the options:

(A) Sales less Fixed Cost: This calculation does not represent a standard financial metric.

(B) Sales less Variable Cost: This is the correct definition of Contribution. It is the portion of sales that is not consumed by variable costs and is therefore available to cover fixed costs.

(C) Sales less Total Cost: This calculation gives the Profit or Loss of the business (Total Cost = Variable Cost + Fixed Cost).

Step 4: Final Answer:
The correct formula for Contribution is Sales less Variable Cost. Therefore, option (B) is the correct answer.