Question

BrewCo sells coffeemakers for $120 each. The firm currently has variable costs per unit of $65. If BrewCo is able to reduce its variable cost per unit to $58, its contribution margin ratio will

A. decrease by about 6 percent.
B. decrease by about 8 percent.
C. increase by about 6 percent.
D. increase by about 8 percent.

Answer 1

C. increase by about 6 percent.

Step-by-step explanation:

Since,

`\text{Contribution margin ratio}=\frac{\text{Sales-Variable expenses}}{\text{Sales}}`

Sales = $ 120,

Original expenses = $ 65

Thus, contribution margin ratio =
`(120-65)/(120)=(55)/(120)=0.4583\approx 0.46`

New expenses = $ 58,

Thus, contribution margin ratio =
`(120-58)/(120) = (62)/(120)=0.5166\approx 0.52`

∵ 52 - 46 = 6,

Hence, the CMR is increased by 6%.

OPTION C is correct.