Your local pizza parlour has annual fixed costs of $20 000, the pizza price is $8 and the unit variable cost $4. What is the contribution margin ratio?

Question

Quizplus · Accepted Answer

The contribution margin ratio is calculated as follows:

Contribution Margin Ratio = (Unit Price - Unit Variable Cost) / Unit Price

= ($8 - $4) / $8

= 50%

This means that for every $1 of sales, $0.50 covers the fixed costs and the rest contributes to profits.

Therefore, the best choice to maximize profits would be to increase sales as much as possible while keeping costs constant, since the contribution margin ratio is 50%.

Your Local Pizza Parlour Has Annual Fixed Costs of $20