Chang Company has two divisions, T and W. The company's overall contribution margin ratio is 40% when combined sales in the two divisions total £900,000. If variable expenses are £200,000 in Division T and if Division W's contribution margin ratio is 20%, the sales in Division W must be
A)£200,000.
B)£425,000.
C)£700,000.
D)£340,000.

Question

Quizplus · Accepted Answer

We know that the overall contribution margin ratio of the company is 40%. We also know that the variable expenses for Division T are £200,000. This means that the total contribution margin for the company is:

Contribution margin = Total sales x Overall contribution margin ratio - Total variable expenses
Contribution margin = £900,000 x 40% - £200,000
Contribution margin = £260,000

We also know that the contribution margin ratio for Division W is 20%. Let's say the sales for Division W are SW. Then, the contribution margin for Division W can be calculated as:

Contribution margin for Division W = SW x 20%

Now, we can use the total contribution margin and the contribution margin for Division W to find the sales for Division W:

Total contribution margin = Contribution margin for Division T + Contribution margin for Division W
£260,000 = (£900,000 - SW) x 40% + SW x 20%
£260,000 = £360,000 - 0.4SW + 0.2SW
0.6SW = £100,000
SW = £166,667 (rounded to nearest pound)

Therefore, the sales for Division W must be £166,667 ÷ 20% = £425,000 approximately. Therefore, the correct answer is B).

Chang Company Has Two Divisions, T and W