Question

EA4.

LO 3.1A product has a sales price of $250 and a per-unit contribution margin of $75. What is the contribution margin ratio?

Answer 1

WipeOut Ski Company faces a $5 loss when producing and selling five units at $25 each because the selling price is lower than the average cost and marginal cost, indicating that decreasing production would be beneficial.

Step-by-step explanation:

Answer to WipeOut Ski Company's Pricing and Profit Analysis

a. Company's Profits or Losses: The total revenues from selling five units at $25 each is $125. However, with the total costs for producing these units at $130, the company faces a loss of $5 overall.

b. Determining Profit or Loss from Average Cost: The average cost for producing five units is $26/unit. Since the selling price of $25 is less than the average cost, the company is at a loss of $1 for each unit sold, leading to a total loss of $5.

c. Effect of the Marginal Unit on Profits: The marginal cost when producing five units is $30/unit, which is higher than the selling price of $25/unit. Therefore, the marginal unit does not contribute to profits, and instead, decreases overall profitability, suggesting a need to reduce production.

Answer 2

Total contribution margin (CM) is calculated by subtracting total variable costs TVC from total sales TSP. Contribution margin per unit equals sales price per unit SP minus variable costs per unit VC . It is used in calculating a break even point of a business. Contribution margin ratio tells us how much contribution towards fixed cost is generate by selling a unit.

CM ratio = $ 75/ $ 250 *100= 30%

(Variable cost = 250 -75 = 175 )