Question

Accents associates sells only one product, with a current selling price of $70 per unit. variable costs are 40% of this selling price, and fixed costs are $12,000 per month. management has decided to reduce the selling price to $65 per unit in an effort to increase sales. assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price. at the current selling price of $70 per unit, the contribution margin ratio is:

Answer 1

Contribution margin is the difference between the selling price and the variable cost. Contribution Margin Ratio is the ratio of contribution per unit divided by the selling price per unit.

So at $70 per unit of sales, the contribution per unit is

Contribution Margin = Selling Price - Variable Cost

Contribution Margin = $70 - ($70 × 40%)

Contribution Margin = $70 - $28

Contribution Margin = $42 per unit

Contribution Margin Ratio = Contribution Margin ÷ Sales Price per unit

Contribution Margin Ratio = $42 ÷ $70

Contribution Margin Ratio = 60%

Hence the Contribution Margin Ratio is 60%.