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A company has a variable cost of $12 per unit and a selling price of $20 per uni

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Question: A company has a variable cost of $12 per unit and a selling price of $20 per unit. What is the contribution margin ratio?

Options:

  1. 40%
  2. 50%
  3. 60%
  4. 70%

Correct Answer: 50%

Solution: 

Contribution margin = Selling price - Variable cost = $20 - $12 = $8. Contribution margin ratio = Contribution margin / Selling price = $8 / $20 = 0.40 or 40%.

A company has a variable cost of $12 per unit and a selling price of $20 per uni

Practice Questions

Q1
A company has a variable cost of $12 per unit and a selling price of $20 per unit. What is the contribution margin ratio?
  1. 40%
  2. 50%
  3. 60%
  4. 70%

Questions & Step-by-Step Solutions

A company has a variable cost of $12 per unit and a selling price of $20 per unit. What is the contribution margin ratio?
  • Step 1: Identify the selling price per unit, which is $20.
  • Step 2: Identify the variable cost per unit, which is $12.
  • Step 3: Calculate the contribution margin by subtracting the variable cost from the selling price: $20 - $12 = $8.
  • Step 4: Calculate the contribution margin ratio by dividing the contribution margin by the selling price: $8 / $20.
  • Step 5: Simplify the fraction: $8 / $20 = 0.40.
  • Step 6: Convert the decimal to a percentage by multiplying by 100: 0.40 * 100 = 40%.
  • Contribution Margin – The contribution margin is the difference between the selling price per unit and the variable cost per unit, indicating how much revenue is available to cover fixed costs and profit.
  • Contribution Margin Ratio – The contribution margin ratio is the contribution margin expressed as a percentage of the selling price, showing the proportion of sales revenue that contributes to fixed costs and profit.
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