Question

The difference between price and average variable cost is known as

• A. Contribution margin per unit
• B. Profit per unit
• C. Lending price
• D. Markup

Hint:

Always remember:
\[ \text{Contribution} = \text{Fixed Costs} + \text{Profit} \] The term "contribution" refers to how much each unit sold "contributes" toward covering fixed overheads.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Marginal costing and cost-volume-profit (CVP) analysis separate costs into fixed and variable components.
This helps evaluate break-even points and product line profitability.
Key Formula or Approach:
The mathematical definition of contribution margin per unit is: \[ \text{Contribution Margin per Unit} = P - \text{AVC} \] where:
- $P$ is the selling price per unit.
- $\text{AVC}$ is the average variable cost per unit.

Step 2: Detailed Explanation:
The difference between unit selling price ($P$) and unit variable cost ($\text{AVC}$) is the surplus left over from sales.
This contribution goes toward recovering fixed overheads.
Once the fixed costs are covered, any additional contribution adds to net profit.
Let us contrast this with the other options:
- Profit per unit is calculated as price minus total unit cost (both fixed and variable): \[ \text{Profit per Unit} = P - \text{ATC} \] - Markup is a pricing method where a percentage is added to cost to determine selling price.
Thus, the difference between price and average variable cost is the contribution margin per unit.

Step 3: Final Answer:
The difference is defined as the contribution margin per unit.