Question

K-Too Everwear Corporation manufactures two styles of mountain climbing shoes for women: Regular and fashion styles. A pair of regular style shoes sells for $135, while the fashion style shoes sell for $160 per pair. The variable cost per pair for regular shoes is $38.94, and that for fashion style shoes is $41.5. K-Too Everwear has fixed costs of $1,800,000. K-Too Everwear has the sales mix of 60% and 40% for regular- and fashion-style shoes, respectively. What is K-Too Everwear’s weighted average contribution margin ratio? Please round your calculations to 4 decimal places and choose the closest answer. A. 72.32% B. 71.92% C. 72.95% D. 73.45%

Answer 1

Contribution margin ratio for Regular Style

Contribution margin ratio for Regular Style = [(Selling price – Variable cost) / Selling price] x 100

= [($135.00 - $38.94) / $135.00] x 100

= [$96.06 / $135.00] x 100

= 71.16%

Contribution margin ratio for Fashion Style

Contribution margin ratio for Fashion Style = [(Selling price – Variable cost) / Selling price] x 100

= [($160.00 - $41.50) / $160.00] x 100

= [$118.50 / $160.00] x 100

= 74.06%

K-Too Everwear’s weighted average contribution margin ratio

Weighted average contribution margin ratio = [Contribution margin ratio for Regular Style x Sales mix] + [Contribution margin ratio for Fashion Style x Sales mix]

= [$71.16% x 0.60] + [74.06% x 0.40]

= 42.69% + 29.63%

72.32%

“Hence, the K-Too Everwear’s weighted average contribution margin ratio will be (A). 72.32%”