Jamara has started a home party business that hosts parties and those attending paint signs. Jamara must pay $500 a year to be a representative for Paint A Sign. In addition, Jamara buys all the materials for the parties, including the metal base, the paints, brushes, stencils, and transfers. These items all add up to $10 on average. Jamara charges each participant $25 for each sign they make. For Jamara's Paint A Sign business, the gross margin or contribution margin for Jamara's business is:
A) $15.
B) $20.
C) $10.
D) $25.

Question

Quizplus · Accepted Answer

The gross margin or contribution margin is calculated by subtracting the variable costs from the sales price. Here, the variable cost is $10 (cost of materials) and the sales price is $25, so the gross margin per sign is $25 - $10 = $15. The $500 annual fee to be a representative is a fixed cost and does not affect the calculation of the gross margin per item.

Jamara Has Started a Home Party Business That Hosts Parties