Which statement best describes the concept of 'contribution margin' in break-even analysis?

• A. Price minus variable cost per unit.
• B. Fixed costs divided by price.
• C. Revenue minus total expenses.
• D. Gross profit divided by revenue.

Answer: (A)

Contribution margin shows how much each sale contributes to covering fixed costs after variable costs are paid. It is calculated by subtracting the variable cost per unit from the selling price. This per-unit amount, when multiplied by units sold, gives the total contribution margin—the funds available to cover fixed costs and, after those are covered, to contribute to profit. In break-even analysis, fixed costs divided by the contribution margin per unit tells you how many units must be sold to break even. This concept is distinct from net income (revenue minus total expenses) and from gross margin (gross profit divided by revenue), and it’s also not fixed costs divided by price.