Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 38

Calculate selling price of new product with a target CM ratio Jackman, Inc., makes and sells many consumer products. The firm’s average contribution margin ratio is 30 percent. Management is considering adding a new product that will require an additional $21,000 per month of fixed expenses and will have variable expenses of $7 per unit.

Required:

a.Calculate the selling price that will be required for the new product if it is to have a contribution margin ratio equal to 30%.

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b. Calculate the number of units of the new product that would have to be sold if the new product is to increase the firm’s monthly operating income by $9,000.

Step 1 of 3

Contribution margin ratio is the ratio of contribution margin to sales. It determines the percentage of sales revenue available to apply towards fixed costs and operating profit.

Contribution margin ratio is computed through the following formula: