Question

Last month when Holiday Creations, Inc., sold 50,000 units, total sales were 200,000 , total variable expenses were 120,000 , and fixed expenses were 65,000 .
(a) What is the company's contribution margin (CM) ratio?

Answer 1

The company's contribution margin (CM) ratio is 40%.

A company's contribution margin ratio (CM ratio) is equal to its revenue left after deducting variable costs divided by its revenue.

It denotes the incremental benefit of one additional unit being produced.

selling price per unit = total sales/by number of units

                                = $200,000/$50,000

                                = $4

variable expenses per unit = total variable expenses/the number of units

                                          = $120,000/$50,000

                                          = $2.4 per unit

Contribution margin per unit = selling price per unit - variable cost per unit

                                            = $4 - $2.4

                                            = $1.6

The contribution margin ratio is now calculated as follows:

contribution margin ratio = contribution margin per unit/ selling price per unit

                                      = $1.6/$4

                                      = 0.4 or 40%

Hence, The company's contribution margin (CM) ratio is 40%.

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