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11 November, 00:06

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?

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  1. 11 November, 00:46
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    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%.
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