Management of a company is evaluating two potential orders.Due to limited capacity only one of these orders can be accepted.Incremental fixed costs are the same for either option.Based on the information in the table below, which of the following statements is true? $\begin{array}{|l|l|l|}
\hline & \text { Option A } & \text { Option B } \
\hline \text { Number of units } & 30 & 40 \
\hline \text { Contribution margin ratio } & 35 \% & 45 \% \
\hline \text { Selling price per unit } & \$ 400 & \$ 300 \
\hline
\end{array}$
A)Option B has the highest contribution margin per unit.
B)Option A has the highest total contribution margin.
C)Option B has the lowest contribution margin ratio.
D)Option B has the highest total contribution margin.
E)Option A has the highest amount per dollar of sales to contribute to contribution margin and profit.

Question

Quizplus · Accepted Answer

To calculate the total contribution margin for each option, we can use the formula:
Total contribution margin = (selling price per unit x number of units x contribution margin ratio)
For option A: Total contribution margin = ($400 x 30 x 0.35) = $4,200
For option B: Total contribution margin = ($300 x 40 x 0.45) = $5,400
Since option B has the highest total contribution margin, it should be chosen. Therefore, option A is eliminated as a choice. 
Option B also has the highest contribution margin per unit ($135) compared to option A ($140). Therefore, option A does not have the highest contribution margin per unit as stated in choice A. 
Option B has a higher contribution margin ratio of 45%, compared to option A's 35%. Therefore, option B does not have the lowest contribution margin ratio as stated in choice C. 
Finally, option A's contribution margin ratio is lower than option B's, so it will have a lower amount per dollar of sales to contribute to contribution margin and profit as stated in choice E.

Management of a Company Is Evaluating Two Potential Orders A)Option B Has the Highest Contribution Margin Per Unit