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Profit and Contribution

Explain the difference between profit and contribution in an objective function. Why is it important for the decision maker to know which of these the objective function coefficients represent?

Solution Preview

Difference between profit and contribution in an objective function: Profit is equal to total revenue minus total variable cost minus total fixed cost, which can be modified as total contribution less of total fixed cost. Contribution is equal to total revenue minus total variable cost, which can be modified as total contribution. Difference between profit and contribution in an objective function is inclusion (non-inclusion) of fixed cost.

Objective function:
Profit = Total revenue - total variable cost - total fixed cost
= Unit ...

Solution Summary

This solution explains the difference between profit and contribution in an objective function and why is it important for the decision maker to know which of these the objective function coefficients represent. This solution is 349 words.

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