Kumar produces large decorative tiles used in home decor.The tiles sell for $700 and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | }
\hline \text { Rent and utilities } & \$ 1,100 \
\hline \text { Management salaries } & 2,500 \
\hline \text { Other expenses } & 530 \
\hline
\end{array}$$ Kumar's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.70 went to cover his fixed costs,and that anything past that point was pure profit.
Kumar is planning to increase the selling price to $760.What impact will the increase in selling price have on the contribution margin ratio?
A) It will stay the same.
B) It will go up from 70% to 72%.
C) It will go up from 70% to 79%.
D) It will go down from 79% to 72%.

Question

Kumar produces large decorative tiles used in home decor.The tiles sell for $700 and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 1,100 \
\hline \text { Management salaries } & 2,500 \
\hline \text { Other expenses } & 530 \
\hline
\end{array}$$ Kumar's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.70 went to cover his fixed costs,and that anything past that point was pure profit.
Kumar is planning to increase the selling price to $760.What impact will the increase in selling price have on the contribution margin ratio?
A) It will stay the same.
B) It will go up from 70% to 72%.
C) It will go up from 70% to 79%.
D) It will go down from 79% to 72%.

Quizplus · Accepted Answer

The contribution margin ratio increases because the selling price increases while the variable costs remain the same, leading to a higher percentage of each sales dollar contributing to fixed costs and profit.

Kumar Produces Large Decorative Tiles Used in Home Decor Kumar's Accountant Told Him About Contribution Margin Ratios and He