An ice cream stall is planning to sell 1,000 ice creams at $4 each at the next Gold Coast grand prix event. This will generate a contribution margin ratio of 75%. If the ice cream stall will break even at this level of sales, what are its fixed costs associated with the event.

Question

Quizplus · Accepted Answer

Contribution margin = Sales - Variable costs
Contribution margin ratio = Contribution margin / Sales
Given, contribution margin ratio = 75%
Sales = 1000 x $4 = $4000
Contribution margin = 75% x $4000 = $3000
At break-even, contribution margin = Fixed costs
Therefore, fixed costs = $3000 - variable costs
Variable costs = 25% x $4000 = $1000
Fixed costs = $3000 - $1000 = $2000

Hence, the answer is choice letter C.

An Ice Cream Stall Is Planning to Sell 1,000 Ice