Question

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $360,000 to $445,500 and would decrease the current variable costs of $60 by $15 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $900,000 and current break-even units are 9,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be:

Answer 1

Revised contribution margin ratio = 0.55 or 55%

Step-by-step explanation:

Contribution margin is calculated as the difference between Sales and variable costs. Contribution margin per unit can be calculated by deducting the variable cost per unit from the price per unit. It tells us how much each unit sale is contributing towards covering the overall fixed costs.

Contribution margin = Sales - Variable costs

The contribution margin ratio is when contribution margin is expressed as a percentage of sales. It can be calculated as follows,

Contribution margin ratio = (Selling price per unit - variable cost per unit) / Selling price per unit

Revised variable costs are = 60 - 15 = 45

The revised contribution margin ratio will be,

Revised contribution margin ratio = (100 - 45) / 100

Revised contribution margin ratio = 0.55 or 55%