Question

Brewco sells coffee makers 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 ratios are

Answer 1

Contribution margin is calculated via subtracting the variable cost per unit to the sales price per unit. In equation, we have

Contribution margin = Sales Price - Variable Cost

Contribution margin ratio is calculated via dividing the contribution margin with the sales price. In equation, we have

Contribution margin ratio = contribution margin/sales price

Substituting the given values,
Contribution margin ratio for 65$ variable cost = (120-65)/120 = 0.4583 
Contribution margin ratio for 58$ variable cost = (120-58)/120 = 0.5167

ANSWERS: 0.4583 or 45.83% and 0.5167 or 51.67%