Contribution Margin Ratio – Short Answer

Practice Question

Intro to Managerial Accounting
Decision-Making: Cost-Volume-Profit Analysis
Contribution Margin Analysis
Short Answer

A company has total sales of $200,000, variable costs of $120,000, and total fixed costs of $50,000. What is the contribution margin ratio?

Answer +
Correct Answer: 40%
Explanation +

Step 1: Calculate Contribution Margin = Sales - Variable Costs = 200,000 - 120,000 = 80,000

Step 2: Contribution Margin Ratio = Contribution Margin ÷ Sales = 80,000 ÷ 200,000 = 0.40 or 40%

Conclusion: The contribution margin ratio is 40%, which means 40% of each sales dollar contributes to covering fixed costs and profit.