Question

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 50,000 units at $5.00/unit. Below is a listing of estimated expenses. Category Total Annual Expenses % of Annual Expense that are Fixed Materials $50,000 10% Labor $90,000 20% Overhead $40,000 30% Marketing/Admin $20,000 50% A Canadian firm was contracted to sell the product and will receive a commission of 10% of the sales price. No U.S. home office expenses will be allocated to the new facility. The contribution margin ratio for Garfield Corporation is A. 172.00%. B. 28.00%. C. 72.00%. D. 38.00%.

Answer 1

Answer: Option (B) 28.00%

Explanation:

Contribution = Sales - Variable cost

Sales = $50,000 * $5.00 = $250,000

Variable cost :

Material = $50,000 * 90% = $45,000

Labor = $90,000 * 80% = $72,000

Over head = $40,000 * 70% = $28,000

Marketing / Admin = $20,000 * 50% = $10,000

Commission = $250,000 * 10% = $25,000

Total variable cost = $45,000 + $72,000 + $28,000 + $10,000 + $25,000 = $180,000

Contribution = $250,000 - $180,000

Contribution = $70,000

Contribution margin = (Contribution / Sales) * 100

= ($70,000 / $250,000) * 100

Contribution Margin = 0.28 *100 = 28%