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Product 1 has a contribution margin ratio of 38.0% and Product 2 has 55.0%, on sales of $180,000 and $140,000. What does this say about Product 2?
AIts selling price per unit must be the higher one
BIts total sales value must be the larger of the two
CIts fixed costs are lower than those of Product 1
DIts variable costs are proportionately the lower
Answer & Solution
Correct answer: D. Its variable costs are proportionately the lower
1. A contribution margin ratio compares margin to sales, so it is driven by variable costs as a share of revenue.
2. Product 2 keeps 55 cents of every sales dollar while Product 1 keeps only 38 cents.
3. That gap comes from Product 2 having proportionately lower production and selling costs.
4. Sales of Product 2 are in fact the smaller of the two at $140,000, so size is not the cause.
5. Fixed costs never enter a contribution margin ratio, so they cannot explain the difference.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 6.6 Contribution Margin Analysis_
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