Certified Supply Chain Professional (CSCP) Practice Exam

How does a positive contribution margin affect profit?

1. It reduces overall costs

2. It stabilizes cash flow

3. Increased demand will increase profit

4. It limits financial risk

The correct answer is: Increased demand will increase profit

A positive contribution margin indicates that the sales revenue from a product is greater than the variable costs associated with producing that product. This situation contributes positively to overall profitability because the money left over after covering variable costs can be applied towards fixed costs and profits. When demand for a product increases, the sales volume rises, which generally leads to higher profits, as the contribution margin per unit remains intact unless there are significant changes in pricing or variable costs. Therefore, with higher demand, the total contribution margin increases, resulting in increased profit. This relationship highlights the significance of understanding how contribution margin works within the context of sales and demand—both of which are critical for strategic decision-making in areas like pricing, marketing, and production.