Question

If sales are $620,000, variable costs are 35% of sales, and operating income is $160,000, what is the contribution margin ratio?

65% 35% 25% none of the above

Answer 1

ANS is 65%

The contribution margin is equal to sales revenue minus variable cost and variable expenses i.e. Contribution margin ratio is the percentage of sales that remains after all variable cost and variable expenses have been deducted from sales.

In this example variable cost is 35% of sales , that means remaining 65% is contribution margin ratio.

We can also compute 65% by following the below method.

Sales given is $ 620,000

Variable cost = 35% of sales = 35% × $620,000 = $217,000

Contribution margin = Sales - Variable cost = $620,000 - $217,000 = $403,000

We have formula for contribution margin ratio as:

Contribution margin ratio = (Contribution margin ÷ Sales) ×100 =( $403,000 ÷ $620,000)×100 = 65 %