Question

Hayes Company operated at normal capacity during the current year. Sales occurred at an average price of $20.80 per unit. Variable manufacturing costs were $11.19 per unit, and variable marketing costs were $5.10 per unit sold. Fixed costs were incurred uniformly throughout the year and amounted to $177087 for manufacturing.

If Hayes’s variable manufacturing costs unexpectedly increase by 10%, what is the new unit selling price that would yield the same contribution margin ratio as before the cost increase?

Select one:

a. $20.80

b. $22.88

c. $22.23

d. $194795.70

Answer 1

Contribution Margin per unit = Unit Selling Price - Variable manufacturing cost - Variable marketing cost

= $20.80 - $11.19 - $5.10 = $4.51 per unit

Contribution Margin Ratio = (Contribution margin per unit/Unit selling price)*100

= ($4.51/$20.80)*100 = 21.68269%

Total variable cost after increase = Variable manufacturing costs+Variable marketing costs

= ($11.19*1.10)+$5.10

= $12.309+$5.10 = $17.409 per unit

Existing variable cost ratio = 100% - Contribution margin ratio

= 100% - 21.68269% = 78.31731%

New unit selling price after increase = Total variable cost after increase/Existing variable cost ratio

= $17.409/78.31731% =$22.23 per unit

Therefore $22.23 is the new selling price that would yield the same contribution margin ratio as before the cost increase. Hence the correct option is c) $22.23.