Kim Action Toys makes a product with a selling price of $10. Variable costs are

Question

Kim Action Toys makes a product with a selling price of $10. Variable costs are $8. Fixed costs are $500. The company is considering RAISING the selling price to $11. By computing the contribution ratio under EACH INDEPENDENT SITUATION. Answer the following problems.

1) What is the contribution ratio using the current selling price?
2) What is the dollar sales volume required for Kim Action Toys to break-even using the current selling price?
3) What is the contribution margin using the proposed selling price?
4) What is the dollar sales volume required for Kim Action Toys to break-even using the proposed selling price?

Explanation / Answer

Answer 1. Contribution Ratio = Contribution / Sales X 100 Contribution = $10 (SP) - $8 (Variable Cost) = $2 Contribution Ratio = $2 / $8 X 100 = 25% Answer 2. Break Even Sales = Fixed Cost /Contribution Per Unit Break Even Sales = $500 / $2 = 250 Units Answer 3. Contribution Margin = Sales - Variable Cost Contribution Margin = $11 -$8 = $3 per unit Answer 4. Break Even Sales = Fixed Cost /Contribution Per Unit Break Even Sales = $500 / $3 = 166.67 or 167 Units

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