Question

If Sue has a contribution margin per unit of $5, which of the following unit price and unit variable costs would apply

Answer 1

Answer:

The correct answer is D.  Unit Price of US$10, Variable unit costs of US$5.

Explanation:

1. Let's remember the definition of contribution margin.

The contribution margin of any company is the difference between sales volume and variable costs.  Or to put it other words: the contribution margin is the benefits of a company, regardless of fixed costs.  

Fixed costs are costs that don't vary with the volume of production. Some examples are rent, some insurances and salaries. Variable costs, on the other hand, are those that change with a variation in the volume of production.

Contribution margin = Sales - Variable costs

2. Let's find out the unit price and the variable costs, if the contribution margin of Sue is US$ 5 per unit:

Option A: Price per unit = US$ 5 and Variable costs = US$ 10.

So, the contribution margin is 5 - 10 = - 5. These values don't apply to Sue's business.

Option B: Price per unit = US$ 10 and Variable costs = US$ 10.

So, the contribution margin is 10 - 10 = 0. These values don't apply to Sue's business.

Option C: Price per unit = US$ 20 and Variable costs = US$ 10.

So, the contribution margin is 20 - 10 = 10. These values don't apply to Sue's business.

Option D: Price per unit = US$ 10 and Variable costs = US$ 5.

So, the contribution margin is 10 - 5 = 5. These values apply to Sue's business.