Question

Liberty Bicycles sells bikes for $340 each. The firm has variable costs per unit of $160. Given these figures, what is Liberty's contribution margin ratio?

A) 20%
B) 30%
C) 40%
D) 50%

Answer 1

The contribution margin ratio for Liberty Bicycles, after calculating the difference between the selling price and variable cost per unit and dividing by the selling price per unit, is approximately 52.94%, which is rounded down to the closest given option D), 50%.

Step-by-step explanation:

The contribution margin ratio is calculated by subtracting the variable cost per unit from the selling price per unit, and then dividing the result by the selling price per unit. For Liberty Bicycles, the calculation would be as follows:

• Selling price per bike: $340
• Variable cost per bike: $160

Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

Contribution Margin per Unit = $340 - $160 = $180

Contribution Margin Ratio = (Contribution Margin per Unit / Selling Price per Unit) × 100

Contribution Margin Ratio = ($180 / $340) × 100 = 52.94%

The closest answer provided in the options would be D) 50%, as the actual contribution margin ratio of 52.94% is rounded down to 50%.