Question

In two companies making the same product and with the same total sales and total expenses the contribution margin ratio will be higher in the company with a higher proportion of fixed expenses in its cost structure. True/ False?

Answer 1

Answer:

True

Explanation:

Fixed costs refer to those costs which do not change with the change in the output level. For example, rent of the factory is not dependend on the output level.

Variable costs are those costs which vary or change with the level of the output produced. For example, employee incentives, commission, etc.

Contribution margin refers to the sales revenue earned over and in excess of variable expenses incurred.

Contribution margin = $Sales\ Revenue\ -\ Variable\ Costs$

Contribution margin ratio represents an enterprize's earnings and it's suffieciency in paying off fixed expenses and profit generation.

It is expressed as,

$Contribution\ Margin\ Ratio\ = \frac{Contribution\ Margin}{Sales\ Revenue}$

Given everything else being same, an enterprise with higher proportion of fixed expenses will have a higher contribution margin ratio since in that case, proportion of variable expenses will be less, which would increase the contribution margin.