Question

Which of the following represents the excess of the selling price per unit of a product over the variable cost of obtaining and selling each unit?

A) Gross margin
B) Contribution margin per unit
C) Net income
D) Operating income

Answer 1

The excess of the selling price over the variable cost per unit is the contribution margin per unit. Marginal cost calculations are essential to determine whether additional production adds to profit. In contrast, if marginal costs are higher than selling prices, losses may occur.

Step-by-step explanation:

The excess of the selling price per unit of a product over the variable cost of obtaining and selling each unit is best described by the contribution margin per unit. This margin is fundamental in covering fixed costs and contributing to net income once fixed costs have been covered.

Marginal costs, on the other hand, are used to determine whether producing additional units is financially viable and are calculated by the change in total cost divided by the change in output. When marginal costs are lower than the additional revenue from selling another unit, the marginal unit is adding to profit. Conversely, if the marginal costs exceed the selling price, producing more units may lead to losses.

Considering the example of a company like WipeOut Ski Company, if they produce five units at a cost higher than the selling price, they would incur losses because the marginal unit is not adding to profit. Hence, understanding marginal costs and contribution margin per unit is crucial for making informed production and pricing decisions.