Question

In the current period, Rabbitt Corporation sold 4,000 units of its product, recording total sales $155,400. Rabbitt’s variable expense ratio was 60% and fixed expenses were $50,000. If Rabbitt’s sales increased to 4,500 units, its total contribution margin would be closest to:

	a.	$ 69,930
	b.	$ 93,240
	c.	$ 62,100
	d.	$104,895

Answer 1

Option (a) 69930 is the answer.

Contribution is the amount of earnings remaining after all direct costs have been subtracted from revenue. This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs equals the profit earned.

Contribution = sales price- variable cost

Sales value for 4000 unit = 155400

Sale value per unit = sales/number of unit

= 155400/4000 = 38.85/unit

Sale value of 4500 unit = 4500 × 38.85

= 174825

Less : Variable cost (60%) = 104895

contribution = 69930

2nd method

sales price per unit = 38.85

Variable cost per unit(60%) = 38.85×60% = 23.31

contribution per unit = 38.85 - 23.31 = 15.54

Contribution for 4500 unit = 4500×15.54 =69930