MANAG ACCT F/..(LL)+CONNECT W/PROCTORIO+
MANAG ACCT F/..(LL)+CONNECT W/PROCTORIO+
5th Edition
ISBN: 9781266018183
Author: Noreen
Publisher: MCG
Question
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Chapter 2, Problem 2.1Q
To determine

 

Concept introduction:

The contribution margin represents the amount of margin that is available from sales after incurring variable costs out. The formulas for contribution margin and contribution margin ratio are as follows:

To indicate: The meaning of the contribution margin ratio and its use in planning business operations. 

Expert Solution & Answer
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Explanation of Solution

The formula to calculate contribution are:

Contribution margin = Sales - Variable cost

And, Contribution margin ratio = ContributionSales

The contribution margin ratio indicates the percentage of contribution margin over sales. in other words, the contribution margin ratio indicates the % of sales that shall be available after subtracting variable costs. 

The contribution margin ratio is used by the companies in managerial decisions. A company can use the contribution margin ratio to evaluate the incremental benefits from increased prediction capacity. 

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