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Selling price rises from $25 to $30 on 1,000 units while variable cost stays at $10 per unit and fixed costs stay at $8,000. What are the new contribution margin ratio and operating income?
A60% and operating income of $12,000
B67% and operating income of $12,000
C67% and operating income of $7,000
D60% and operating income of $7,000
Answer & Solution
Correct answer: B. 67% and operating income of $12,000
1. New sales are 1,000 units times $30, which is $30,000.
2. Variable costs are unchanged at 1,000 units times $10, which is $10,000.
3. Contribution margin is $30,000 minus $10,000, which is $20,000.
4. The ratio is $20,000 divided by $30,000, which rounds to 67%.
5. Operating income is $20,000 minus fixed costs of $8,000, which is $12,000.
6. Holding the ratio at 60% is the trap: a price rise lifts the ratio because variable cost per unit did not move with it.
7. Keeping income at $7,000 ignores the extra $5 of margin earned on each of the 1,000 units.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.2.1 Contribution Margin_
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