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14 February, 14:22

Digby's product manager is considering lowering the price of the Daft product by $2.50 and wants to know what the impact will be on the product's contribution margin. Assuming no inventory carry costs, what will Daft's contribution margin be if the price is lowered?

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  1. 14 February, 14:56
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    D. 34.00%

    Explanation:

    The computation of the new contribution margin is shown below:

    As we know that

    Contribution Margin = Net Sales Revenue - Variable Expenses

    where,

    Net sales revenue is

    = 604 units * $32.5

    = $19,630

    The variable expense = Total material cost + total labor cost

    Total Material Cost = 604 units * $14.36 = $8,673.44

    Total Labor Cost = 604 units * $7.09 = $4,282.36

    So, the variable expense is

    = $8,673.44 + $4,282.36

    = $12,955.8

    Now

    Contribution margin = $19,630 - $12,955.8 = $6,674.2

    And,

    Contribution margin ratio = Contribution margin : net sales

    So, Contribution margin = $6,674.2 : $19,630

    = 34.00%
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