Which statement correctly defines the contribution concept used in short-term decision making?

Which statement correctly defines the contribution concept used in short-term decision making?

• A. Contribution is selling price minus all variable costs used for short-term decision making.
• B. Contribution equals total revenue minus total costs.
• C. Contribution is the amount left after deducting fixed costs.
• D. Contribution per unit times quantity.

Answer: (A)

In short-term decision making, the amount we can use to cover fixed costs and contribute to profit is the revenue left after paying variable costs. This is the idea of contribution: it equals the selling price minus the variable cost per unit (or, for the whole period, total revenue minus total variable costs). This focus on variable costs is what makes it useful for quick, incremental decisions, since those costs change with the level of activity. So the statement that defines contribution in this context is selling price minus variable costs used for short-term decisions. It captures the incremental funds available from each sale to cover fixed costs and then contribute to profit. Profit, by contrast, is total revenue minus total costs (including fixed costs), which isn’t the same concept used in short-term decision making. Saying the amount left after fixed costs is profit after fixed costs describes profit, not contribution. And while total contribution can be found by multiplying per-unit contribution by quantity, the fundamental definition remains selling price minus variable costs per unit.

In short-term decision making, the amount we can use to cover fixed costs and contribute to profit is the revenue left after paying variable costs. This is the idea of contribution: it equals the selling price minus the variable cost per unit (or, for the whole period, total revenue minus total variable costs). This focus on variable costs is what makes it useful for quick, incremental decisions, since those costs change with the level of activity.

So the statement that defines contribution in this context is selling price minus variable costs used for short-term decisions. It captures the incremental funds available from each sale to cover fixed costs and then contribute to profit.

Profit, by contrast, is total revenue minus total costs (including fixed costs), which isn’t the same concept used in short-term decision making. Saying the amount left after fixed costs is profit after fixed costs describes profit, not contribution. And while total contribution can be found by multiplying per-unit contribution by quantity, the fundamental definition remains selling price minus variable costs per unit.