Question

If sales are $425,000, variable costs are 62% of sales, and operating income is $50,000, what is the contribution margin ratio? select one:
a. 38%
b. 26.8%
c. 11.8%
d. 62%

Answer 1

Answer:

The answer is a): 38%.

Step-by-step explanation:

Contribution margin ratio is a ratio of the difference between sales and variable costs/expenses, to the sales; it can be expressed in percentage.

Sales = $425,000

Variable costs = 62% of $425,000 = 62 × $425,000 ÷ 100 = $263,500 .

The difference between sales and variable cost = $425,000 — $263,500 = $161,500 .

Therefore, the contribution margin ratio = $161,500 ÷ $425,000 = 0.38

The contribution margin ratio expressed in percentage = 0.38 × 100 = 38% .

Answer 2

In an internal operating income statement, the form is as such:

(1) Sales (or Revenue) - Total Variable Costs = Contribution Margin;

(2) Contribution Margin - Total Fixed Costs = Operating Income

and

(3) Contribution Margin Ratio = Contribution Margin/Sales

The first equation helps us out. Sales is the whole amount for this statement, or 100%. We know variable costs are 62% and the rest goes to the Cont. Margin.

100% - 68% = 32% (choice A)