Question

Product 1 has a contribution margin of $6 per unit, and Product 2 has a contribution margin of $7.50 per unit. Total fixed costs are $300,000. Sales mix and total volume varies from one period to another. Which of the following is TRUE?

At a sales volume in excess of 25,000 units of Product 1 and 25,000 units of Product 2, operations will be profitable.
The ratio of net profit to total sales for Product 2 will be larger than the ratio of net profit to total sales for Product 1.
The contribution margin per unit of direct materials is lower for 1 than for 2.
The ratio of total contribution margin to total sales always will be larger for Product 1 than for Product 2.

Answer 1

At sales volumes exceeding 25,000 units each, operations for Products 1 and 2 will be profitable due to contribution margins surpassing fixed costs. The comparison of profit ratios and contribution margin per unit of direct materials requires further data on selling prices and direct material costs.

Step-by-step explanation:

When determining whether operations will be profitable at a certain sales volume, one needs to consider the contribution margin of each product and the total fixed costs. In this case, Product 1 has a contribution margin of $6 per unit, and Product 2 has a contribution margin of $7.50 per unit, with total fixed costs amounting to $300,000. Assuming the sales mix is 1:1, at a sales volume exceeding 25,000 units for each product, the total contribution margin would exceed the fixed costs, thus operations would become profitable.

Regarding the ratio of net profit to total sales for each product, without knowing the respective selling prices, we cannot definitively conclude which product's ratio is higher as we only know the contribution margins. The remaining statements cannot be accurately validated without additional information on the direct material costs or the selling prices of both products.