Question

Kay Ltd makes a product with the following financial​ characteristics:

Selling price: 40
Materials: 16
Labour: 8
Fixed overheads: 12
Profit: 4

Employees are paid a constant monthly income and are employed on a​ five-year contract.
What is the contribution margin ratio of the​ product?

A. ​30%
B. ​60%
C. ​10%
D. ​40%

Answer 1

The contribution margin ratio of Kay Ltd's product is 40%, calculated by dividing the contribution margin of 16 (selling price of 40 minus materials and labor costs of 24) by the selling price of 40. The correct answer is option D.

Step-by-step explanation:

The question asks for the calculation of the contribution margin ratio of a product made by Kay Ltd. The contribution margin ratio is found by dividing the contribution margin by the selling price. The contribution margin is the difference between the selling price and the variable costs (materials and labor in this case).

To calculate the contribution margin ratio, we first determine the contribution margin:

Selling Price - (Materials + Labor) = Contribution Margin
40 - (16 + 8) = 16

Now, the contribution margin ratio is the contribution margin divided by the selling price:

Contribution Margin / Selling Price = Contribution Margin Ratio
16 / 40 = 0.4 or 40%

This means the contribution margin ratio of the product is 40%, which corresponds to option D.