Question

g The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The souvenir sheets usually contain several high-value St. Vincent stamps depicting a common theme, such as the life of Princess Diana. The souvenir sheets are designed and printed for the postal service by Imperial Printing, a stamp agency service company in the United Kingdom. The souvenir sheets cost the postal service $1.25 each. St. Vincent has been selling these souvenir sheets for $8.00 each and ordinarily sells about 63,000 units. To test the market, the postal service recently priced a new souvenir sheet at $9.00 and sales dropped to 53,000 units. Required: 1a. Calculate the contribution margin for sale price of $8.00 each or $9.00 each

Answer 1

Contribution margin for sale price of $8.00 each is $425,250

Cntribution margin for sale price of $9.00 each is $410,750

Step-by-step explanation:

Contribution margin (CM) of product can be estimated by deducting the total variable costs from total sales revenue. This can be estimated as follows:

(a) Contribution margin for sale price of $8.00 each

Total sales revenue = 63,000 * $8.00 = $504,000

Totals variable cost = 63,000 * $1.25 = $78,750

Total Contribution margin = $504,000 - $78,750 = $425,250

(b) Contribution margin for sale price of $9.00 each

Total sales revenue = 53,000 * $9.00 = $477,000

Totals variable cost = 53,000 * $1.25 = $66,250

Total Contribution margin = $477,000 - $66,250 = $410,750