Which of the following best describes the weighted average contribution margin in relation to net sales?

• A. It is the average gross profit margin for all products, weighted by their net sales.
• B. It is the average amount by which net sales exceed variable costs, weighted by the sales mix of each product.
• C. It is the total net sales divided by the number of products sold.
• D. It is the difference between net sales and fixed costs, averaged across all products.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of contribution margin. Contribution margin is the amount by which net sales exceed variable costs. It represents the portion of sales revenue that contributes to covering fixed costs and generating profit.
2. Step 2: Recognize the term 'weighted average contribution margin.' This refers to the average contribution margin across all products, adjusted (weighted) based on the sales mix of each product. The sales mix is the proportion of total sales represented by each product.
3. Step 3: Analyze the options provided in the problem. The correct description should align with the definition of weighted average contribution margin, which involves net sales, variable costs, and the sales mix.
4. Step 4: Eliminate incorrect options. For example, the option describing 'gross profit margin' is unrelated to contribution margin, and the option involving 'fixed costs' does not pertain to the calculation of contribution margin.
5. Step 5: Select the correct answer: 'It is the average amount by which net sales exceed variable costs, weighted by the sales mix of each product.' This accurately describes the weighted average contribution margin in relation to net sales.