Question

BrewCo sells coffeemakers for $120 each. The firm currently has variable costs per unit of $65. If BrewCo is able to reduce its variable cost per unit to $58, its contribution margin ratio will
A. decrease by about 6 percent.
B. decrease by about 8 percent.
C. increase by about 6 percent.
D. increase by about 8 percent.

Answer 1

Answer:

C. increase by about 6 percent.

Explanation:

Since,

$\text{Contribution margin ratio}=\frac{\text{Sales-Variable expenses}}{\text{Sales}}$

Sales = $ 120,

Original expenses = $ 65

Thus, contribution margin ratio = $\frac{120-65}{120}=\frac{55}{120}=0.4583\approx 0.46$

New expenses = $ 58,

Thus, contribution margin ratio = $\frac{120-58}{120} = \frac{62}{120}=0.5166\approx 0.52$

∵ 52 - 46 = 6,

Hence, the CMR is increased by 6%.

OPTION C is correct.