If a company has a total sales of $200,000 and total variable costs of $120,000,
Practice Questions
Q1
If a company has a total sales of $200,000 and total variable costs of $120,000, what is the contribution margin ratio?
40%
60%
20%
80%
Questions & Step-by-Step Solutions
If a company has a total sales of $200,000 and total variable costs of $120,000, what is the contribution margin ratio?
Step 1: Identify the total sales amount, which is $200,000.
Step 2: Identify the total variable costs amount, which is $120,000.
Step 3: Calculate the contribution margin by subtracting total variable costs from total sales: $200,000 - $120,000.
Step 4: The result of the subtraction is the contribution margin, which is $80,000.
Step 5: Calculate the contribution margin ratio by dividing the contribution margin by total sales: $80,000 / $200,000.
Step 6: The result of the division is 0.4.
Step 7: Convert the ratio to a percentage by multiplying by 100: 0.4 * 100 = 40%.
Contribution Margin – The contribution margin is the difference between total sales and total variable costs, 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 total sales, showing the proportion of sales that contributes to covering fixed costs.
