The contribution margin equals sales minus all:

• A. variable costs
• B. fixed costs
• C. cost of goods sold and administrative expenses
• D. operating expenses

Answer: (A)

Verified step by step guidance

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.