Vice President for Sales and Marketing Sam Totter is trying to plan for the comi

Question

Vice President for Sales and Marketing Sam Totter is trying to plan for the coming year in terms of production needs to meet the sales demand. He is also trying to determine ways in which the company’s profits might be increased in the coming year.

Waterways markets a simple water control and timer that it mass-produces. During 2013, the company sold 696,000 units at an average selling price of per solution $4.20 per unit. The variable expenses were $1,900,080, and the fixed expenses were $683,256.

What is the product’s contribution margin ratio? (Round ratio to 0 decimal places, e.g. 25%.)

Explanation / Answer

Contribution margin ratio = Sales – Variable expenses / Sales   * 100

                  Sales = 696000 * 4.20 = 2923200

                  Variable expenses = 1900080

Contribution margin ratio = 2923200 – 1900080 / 2923200 * 100

                                                 = 1023120 / 2923200 *100

                                                = 35 %

Conclusion: - The product’s contribution margin ratio = 35%

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