Question

Davison Co. prepared the following contribution format income statement based on a sales volume of 10,000 units (the relevant range of production is 5,000 units to 15,000 units):

Sales $225,000
Variable expenses 135,000
Contribution margin 90,000
Fixed expenses 67,500
Net operating income $22,500

Required:
What is the variable expense ratio?

Answer 1

The variable expense ratio is calculated by dividing the total variable expenses by the sales revenue. Fixed expenses are not relevant to calculating the variable expense ratio.

Step-by-step explanation:

The variable expense ratio is a measure used to determine the proportion of variable expenses to sales revenue. It is calculated by dividing the total variable expenses by the sales revenue. In the given case, we are provided with the fixed expenses and need to calculate the variable expense ratio. Since fixed expenses do not change with the level of production, we can use the contribution margin ratio formula to calculate the variable expense ratio.

Contribution margin ratio = (Sales revenue - Variable expenses) / Sales revenue

Since the relevant range of production is 5,000 units to 15,000 units, we can assume that the sales volume of 10,000 units is within this range. Therefore, the fixed expenses of $67,500 are not relevant to calculating the variable expense ratio.

Variable expense ratio = 1 - Contribution margin ratio
Variable expense ratio = 1 - [(Sales revenue - Variable expenses) / Sales revenue]

Using the contribution margin ratio, we can calculate the variable expense ratio accordingly.