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48 Bonita Inc. sells two versions of its product, standard and deluxe. The standard model has...

48

Bonita Inc. sells two versions of its product, standard and deluxe. The standard model has a 15.0 percent profit margin and the deluxe model has a 16.7 percent profit margin. The standard model has a 30.1 percent contribution margin and the deluxe has a 22.6 percent contribution margin. If other factors are equal, which product should Bonita emphasize to its customers?

The standard model.

The deluxe model.

Selling either results in the same additional income for the company.

Not enough information is given.
Business   Accounting   
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Homework Answers

Answer #1

The contribution margin is calculated using the following formula:

Contribution margin = (Selling price - Variable cost) / Selling price x 100

The formula to calculate the net profit margin is:

Net profit / Selling price x 100

And, the net profit is calculated by reducing the fixed cost from the contribution margin.

So, if selling either of the versions results in the same additional income for the company, it should look at the product which has a higher contribution margin. This is because the fixed costs will remain the same whichever product is sold.

Hence, Bonita Inc should focus on selling more of the standard model since it has a higher contribution margin (30.1%) as compared to the deluxe model (22.6%).

Hence, Bonita Inc should emphasize the standard model to customers.

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