Perfect Fit Company sells hand-sewn shirts for $55 per shirt.It incurs monthly fixed costs of $7000.The contribution margin ratio is calculated to be 20%.What is the variable cost per shirt?

Question

Quizplus · Accepted Answer

Contribution margin ratio = (Price – Variable cost) / Price
We know the contribution margin ratio is 20%, which means that the variable cost per shirt is 80% of the sale price:
0.20 = (55 – Variable cost) / 55
0.20 * 55 = 11 = 55 – Variable cost
Variable cost = 55 – 11 = $44.00
Therefore, the variable cost per shirt is $44.00 per shirt.

Perfect Fit Company Sells Hand-Sewn Shirts for $55 Per Shirt