Final answer:
To find the new average contribution margin ratio, the contribution margins of the existing and new products are calculated and combined. The total contribution margin divided by total sales results in a new average ratio of 42.9%, making option D the correct answer.
Step-by-step explanation:
To calculate the firm's new average contribution margin ratio after adding a new product, we need to combine the contribution margins of the current and new products. The contribution margin is calculated by subtracting variable costs from sales for each product, then dividing by the total sales. With the current products having sales of $100,000 and an average contribution margin ratio of 40%, the contribution margin is $40,000. The new product with sales of $40,000 and variable costs of $20,000 has a contribution margin of $20,000 and a contribution margin ratio of 50%.
The total new sales would be $100,000 (existing sales) + $40,000 (new product sales) = $140,000. The total new contribution margin is $40,000 (existing products) + $20,000 (new product) = $60,000. The new average contribution margin ratio is then $60,000 / $140,000, or approximately 42.9%. Therefore, the correct answer is D: 42.9%.