Final answer:
True, when the total contribution from a pricing strategy is lower, overall profits will also be lower since fixed costs are subtracted from the contribution.
Step-by-step explanation:
When the total contribution produced by a pricing strategy is lower, it is true that overall profits will also be lower because fixed costs are deducted from the total contribution.
In the domain of business economics, contribution margin represents the portion of sales that helps to cover the fixed costs. Once fixed costs are covered, any additional revenue contributes to profits.
Therefore, if a pricing strategy leads to a decrease in total contribution, it will inherently result in a lower overall profit, considering that fixed costs must still be subtracted.
Fixed costs, often regarded as sunk costs, cannot be recouped and usually should not factor into future decisions about pricing or production levels.
However, variable costs are within the firm's control and can be altered to influence cost structures and profit outcomes. If a firm's total revenues are consistently lower than its total costs at any level of output, it will incur losses, and the best it can do is minimize those losses by choosing the level of output where losses are smallest.