Question

Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable expenses are$6 per unit, and fixed expenses total $180,000 annually.

What is the product’s CM ratio?

Answer 1

The CM ratio for the Stratford Company's lightweight lawn chair is 60%, which is calculated by dividing the contribution margin per unit ($9) by the selling price ($15).

Step-by-step explanation:

The student has asked about the contribution margin (CM) ratio of a product sold by Stratford Company. The CM ratio is a key financial metric used to assess the profitability of a product. To calculate this ratio, we need to know the selling price per unit and the variable cost per unit. The CM ratio is calculated by subtracting the variable cost per unit from the selling price per unit and then dividing that difference by the selling price per unit.

In this case, the lawn chair sells for $15 and has a variable cost of $6 per unit. Thus, the contribution margin per unit would be $15 - $6 = $9. To find the CM ratio, we divide the contribution margin by the selling price:

$9 ÷ $15 = 0.6 or 60%

The product's CM ratio is 60%. This means that for each dollar of revenue generated from selling the lawn chair, 60 cents contribute to covering the fixed expenses and then to profit.