If a company has a sales price of $50, variable costs of $30, and fixed costs of
Practice Questions
Q1
If a company has a sales price of $50, variable costs of $30, and fixed costs of $100,000, what is the contribution margin ratio?
40%
20%
30%
50%
Questions & Step-by-Step Solutions
If a company has a sales price of $50, variable costs of $30, and fixed costs of $100,000, what is the contribution margin ratio?
Step 1: Identify the sales price, which is $50.
Step 2: Identify the variable costs, which are $30.
Step 3: Calculate the contribution margin by subtracting variable costs from sales price: $50 - $30 = $20.
Step 4: Identify the contribution margin, which is $20.
Step 5: Calculate the contribution margin ratio by dividing the contribution margin by the sales price: $20 / $50.
Step 6: Simplify the division: $20 / $50 = 0.4.
Step 7: Convert the decimal to a percentage by multiplying by 100: 0.4 * 100 = 40%.
Contribution Margin – The contribution margin is the difference between sales price and variable costs, indicating how much revenue is available to cover fixed costs and contribute to profit.
Contribution Margin Ratio – The contribution margin ratio is the contribution margin expressed as a percentage of sales price, showing the proportion of sales that contributes to covering fixed costs and profit.
