Question

Dirth company sells only one product at a regular price of $7.50 per unit. variable expenses are 60% of sales and fixed expenses are $30,000. management has decided to decrease the selling price to $6.00 in hopes of increasing its volume of sales. what is the contribution margin ratio when the selling price is reduced to $6 per unit?

Answer 1

Contribution is the difference between the Sales per unit and the variable cost per unit. When the selling price reduced to $6 per unit,

Contribution per unit = Sales per unit - Variable Cost per unit

Contribution per unit = $6 - ($6*0.6)

Contribution per unit = $2.4 per unit.

Now, the contribution margin ratio = Contribution per unit / Sales per unit

Contribution Margin Ratio = $2.4 / $6

Contribution Margin Ratio = 0.4 or 40%

Contribution Margin ratio when the sales price is $6 per unit is 40%.