Angel Toys is a producer of tiny dolls for children.Following is information about its revenue and cost structure: $\begin{array}{ll}\text { Selling price per doll }&\$8.00\
\text { Variable costs per doll: }\\text { Production (manufacturing costs) } & \$ 1.20 \
\text { Selling and administration (non-manufacturing costs) }&\$ 0.40\
\text { Total fixed costs: }\
\text { Production (manufacturing costs) } & \$ 40,000 \text { per year } \
\text { Selling and administration (non-manufacturing costs) } & \$ 32,000 \text { per vear }
\end{array}$ Management is proposing to pay sales people a commission equal to 10% of the variable production cost.What will be the new contribution margin ratio if the commission plan is implemented?

Question

Quizplus · Accepted Answer

The new variable costs per doll will be $1.20 (production) + $0.40 (selling and administration) + $0.12 (10% commission on $1.20 production cost) = $1.72. The contribution margin per doll is $8.00 - $1.72 = $6.28. The contribution margin ratio is $6.28 / $8.00 = 78.5%.

Angel Toys Is a Producer of Tiny Dolls for Children