Define contribution margin and its role in CVP analysis.

• A. Contribution margin = selling price minus variable cost per unit; used to cover fixed costs and determine profitability at different sales levels.
• B. Contribution margin = fixed costs ÷ selling price.
• C. Contribution margin = total revenue − total costs.
• D. Contribution margin = variable costs ÷ selling price.

Answer: (A)

Contribution margin is the amount from each unit sale that remains after covering variable costs and is available to cover fixed costs and contribute to profit. In CVP analysis, this margin shows how much revenue from every unit sold actually helps pay fixed costs and, once they’re covered, adds to profit. The per-unit contribution margin is calculated as selling price per unit minus variable cost per unit, which directly ties to how many units need to be sold to break even and how profit grows with sales. Sometimes analysts also use the contribution margin ratio, which is (selling price − variable cost) divided by selling price, to analyze profitability in dollar terms.

This is why the correct statement reflects the per-unit formula and its role in covering fixed costs and determining profitability across different sales levels. The other options don’t describe contribution margin correctly: fixed costs divided by selling price isn’t the margin, total revenue minus total costs is profit, and variable costs divided by selling price isn’t the margin either.