6) Digby\'s product manager is considering lowering the price of the Drat produc
ID: 452879 • Letter: 6
Question
6) Digby's product manager is considering lowering the price of the Drat product by $2.50 and wants to know what the impact will be on the product’s contribution margin. Assuming no inventory carry costs, what will Drat's contribution margin be if the price is lowered? (select 1) You would have to find the below yourself! Sales: $21,154 (income statement) Material cost: 14.36 (production information) Labor cost: 7.09 (production information) Units sold: 604 (production information) Price: $35 (segment analysis) A. 31.58% B. 30.00% C. 32.30% D. 34.00%
Explanation / Answer
Contribution Margin = Net Revenue - Variable Expenses
Total Material Cost = 604*14.36 = 8673.44
Total Labor Cost = 604*7.09 = 4282.36
current price = $35
if the price is lowered by $2.5 , new price = $35 - $2.5 = $32.50
New Sales = 604 *32.5= $19630
variable expenses = 8673.44+4282.36 = 12955.8
Contribution margin = 19630 - 12955.8 = 6674.2
Contrinution margin ratio = contribution margin / net sales
New Contribution margin = 6674.2/19630 = 34.00%
Option D (34.00%) is the correct answer
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