Higgins Corporation sells three products, Product A, Product B, and Product C Data concerning the company's most recent month of operations, June, appear below:

A)0%
B)30%
C)38%
D)70%

Question

Higgins Corporation sells three products, Product A, Product B, and Product C Data concerning the company's most recent month of operations, June, appear below:

A)0% 
B)30% 
C)38% 
D)70%

Quizplus · Accepted Answer

Product B has the highest CM ratio of 0.38, which means that for every dollar of sales, 38 cents are available to cover fixed expenses and contribute to profits. This makes Product B the most profitable product for Higgins Corporation. Product C has a lower CM ratio of 0.30 but still contributes positively to profits. Product A has a 0% CM ratio, meaning that it does not contribute any profits and should be discontinued. Therefore, the best choice for Higgins Corporation is to focus on producing and selling Product B, and to continue selling Product C while discontinuing Product A.  Total contribution margin = Overall CM ratio × Total sales = 0.38 × $1,500,000 = $570,000
11eaa0ae_3d3c_315e_8fb0_d3c7c9d4f0de_TB2460_00 Total contribution margin = Total sales - Total variable expenses
$570,000 = $1,500,000 - Total variable expenses
Total variable expenses = $1,500,000 - $570,000 = $930,000
11eaa0ae_3d3c_315f_8fb0_e1bebd93f95a_TB2460_00 Total variable expenses = Product A variable expenses + Product B variable expenses + Product C variable expenses
$930,000 = $450,000 + $270,000 + Product C variable expenses
Product C variable expenses = $930,000 - $450,000 - $270,000 = $210,000
11eaa0ae_3d3c_3160_8fb0_e3ae4722ed95_TB2460_00 Product C contribution margin = $300,000 - $210,000 = $90,000
Product C CM ratio = Product C contribution margin ÷ Product C sales = $90,000 ÷ $300,000 = 0.30

Higgins Corporation Sells Three Products, Product A, Product B, and Product