Nonesuch Company sells only one product at a regular price of $7.50 per unit. Variable expenses are 60 percent 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?

Question

Quizplus · Accepted Answer

The contribution margin per unit is the selling price minus the variable cost per unit. With a selling price of $6 and variable expenses at 60% of sales, the variable cost per unit is $3.60 (60% of $6). Thus, the contribution margin per unit is $6 - $3.60 = $2.40. The contribution margin ratio is $2.40 / $6 = 0.40 or 40%.

Nonesuch Company Sells Only One Product at a Regular Price