Question

A business produces a product that generated total sales revenue of​ £16,000 for the year. The business has variable costs of​ £5 per unit and total fixed costs of​ £4,500. The business sold​ 2,000 units of the product during the year.

What is the contribution margin​ ratio?

A. ​37.5%
B. ​62.5%
C. ​9.4%
D. ​71.9%

Answer 1

The contribution margin ratio is calculated by first determining the contribution margin per unit (£8 - £5 = £3) and then dividing that by the selling price per unit (£8), yielding a contribution margin ratio of 37.5%.

Step-by-step explanation:

To find the contribution margin ratio, we first calculate the contribution margin per unit by subtracting the variable cost per unit from the selling price per unit. Then we can find the ratio by dividing the contribution margin per unit by the selling price per unit.

In this case, the selling price per unit can be found by dividing total revenue (£16,000) by the number of units sold (2,000 units), which results in £8 per unit. The variable cost is already given as £5 per unit. Therefore, the contribution margin per unit is £8 - £5 = £3 per unit.

The contribution margin ratio is then £3 (contribution margin per unit) divided by £8 (selling price per unit), which gives us 0.375 or 37.5%. Hence, the contribution margin ratio is A. 37.5%.