Question

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $360,000 to $360,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $1,200,000 and current break-even units are 12,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be: Question 9 options:

Answer 1

40%

Step-by-step explanation:

The computation of contribution margin ratio as given below :-

Variable cost

= $70 - $10

= $60

Selling Price = $100

contribution margin ratio

= (selling price - variable cost) ÷ selling price

= ($100 - $60) ÷ 100

= $40 ÷ 100

= 40%

Therefore for calculating the contribution margin ratio simply we deduct the variable cost from the selling price and divide by selling price.