- A.Three primary approaches to setting price — cost-based, value-based, and competition-based — each appropriate to different market conditions.
- B.Price minus variable cost per unit — the dollars each unit contributes to covering fixed cost and profit. ✓
- C.Setting price by adding a standard markup to product cost — simple but ignores customer willingness to pay and competitor prices.
- D.Price minus variable cost per unit — the dollars each unit contributes to covering fixed cost and profit.
Contribution Margin is price minus variable cost per unit — the dollars each unit contributes to covering fixed cost and profit. The other options describe related but distinct concepts in Pricing — see the deep-dive guide for the full distinction.
How to think about questions like this
The single most important number in pricing and product profitability. Questions like this test whether you can distinguish Contribution Margin from neighboring concepts. The most common trap is choosing a closely-related concept that sounds similar but applies in a different context.
When you see a definition question on an exam, do two things: (1) translate the question into your own words, then (2) generate the answer in your own words before reading the options. This avoids the cognitive bias of recognizing a familiar phrase as correct just because it is familiar.