Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 percent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales. What is the contribution margin ratio when the selling price is reduced to £6 per unit?
A) 25%
B) 40%
C) 75%
D) 60%

Question

Quizplus · Accepted Answer

The contribution margin per unit is the selling price minus the variable cost per unit. With a selling price of £6 and variable expenses at 60% of sales, the variable cost per unit is £3.60 (£6 * 60%). The contribution margin per unit is £6 - £3.60 = £2.40. The contribution margin ratio is £2.40 / £6 = 0.40 or 40%.

Dirth Company Sells Only One Product at a Regular Price