A firm\'s current products have sales of $100,000 and an average contribution ma

Question

A firm's current products have sales of $100,000 and an average contribution margin ratio of 40%. If the firm add a new product with sales of $40,000 and variable costs of $20,000, the firm's new average contribution margin ration will be:

A: 37.8%.

B: 48.7%.

C: 45.0%.

D: 42.9%.

A firm's current products have sales of $100,000 and an average contribution margin ratio of 40%. If the firm add a new product with sales of $40,000 and variable costs of $20,000, the firm's new average contribution margin ration will be: o 378%. o 48.7%. 450% o 42.9%

Explanation / Answer

contribution margin=Sales-Variable costs

contribution margin ratio=contribution margin/Sales

contribution margin for current product=($100,000*40%)=$40,000

contribution margin for new product=(40000-20000)=$20000

Total contribution margin=(40000+20000)=$60000

Total sales=(100,000+40000)=$140,000

Hence new average contribution margin=(60000/140,000)

which is equal to

=42.9%(Approx).

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