Home › ACCA › Management Accounting › Cost Volume Profit Analysis › Unit sales rise from 1,200 to 1,400 while the pr…
Unit sales rise from 1,200 to 1,400 while the price holds at $25 and variable cost holds at $10. What happens to the contribution margin ratio?
AIt stays at 60% because both amounts scale
BIt rises from 60% to 67% on the extra volume
CIt falls from 60% to 40% on the extra volume
DIt stays at 40% because both amounts scale
Answer & Solution
Correct answer: A. It stays at 60% because both amounts scale
1. At 1,200 units, sales are $30,000 and variable costs are $12,000, giving a contribution margin of $18,000.
2. $18,000 divided by $30,000 is 60%.
3. At 1,400 units, sales are $35,000 and variable costs are $14,000, giving a contribution margin of $21,000.
4. $21,000 divided by $35,000 is again 60%.
5. Volume moves sales and variable costs in the same proportion, so the ratio cannot shift.
6. Operating income does rise, from $10,000 to $13,000, but that is the ratio applied to a bigger base.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.2.1 Contribution Margin_
Related questions
A firm below its break-even point is making a loss because contribution margin has not yetRaising the selling price while holding variable cost constant changes the contribution maFixed costs of 13,500 dollars and a contribution margin of 60 dollars per unit give a breaA product selling for 100 dollars with a 60 dollar contribution margin has a contribution A birdbath selling for 100 dollars with 40 dollars of variable cost has a contribution marThe contribution margin ratio tells you what percentage of the selling price exceeds:Contribution margin per unit is available to cover which costs first?A cost that rises by a set amount for each additional unit made is: