Product 1 has a contribution margin of £6.00 per unit, and Product 2 has a contribution margin of £7.50 per unit. Total fixed costs are £300,000. Sales mix and total volume varies from one period to another. Which of the following is TRUE?
A)At a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, operations will be profitable.
B)The ratio of net profit to total sales for 2 will be larger than the ratio of net profit to total sales for 1.
C)The contribution margin per unit of direct materials is lower for 1 than for 2.
D)The ratio of contribution to total sales always will be larger for 1 than for 2.

Question

Quizplus · Accepted Answer

Since the contribution margin per unit of Product 2 is higher than that of Product 1, it is beneficial to have a higher volume of sales for Product 2. Therefore, at a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, the total contribution margin should be able to cover the fixed costs, resulting in profitability. The other options are false statements because there is no information provided regarding net profit ratios, contribution margin per unit of direct materials, or the ratio of contribution to total sales for each product.

Product 1 Has a Contribution Margin of £6