Leather, Inc has two products and it's contribution margin income statement is as follows:
Product A | Product B | Total | |
Sales | $100 | $300 | $400 |
Variable Costs | $40 | $200 | $240 |
Contribution Margin | $60 | $100 | $160 |
Fixed Costs | $200 | ||
Net Loss | $(40) |
1.) Calculate the average contribution margin ratio for Leather, INC.
2.) Calculate the total sales dollar amount needed from both products for Leather, INC to break even.
1)
Contribution Margin of product A = $60
Contribution Margin of product B = $100
Sales of product A = $100
Sales of product B = $300
Total sales = $400
Contribution margin ratio, Product A = Contribution margin/Sales
= 60/100
= 60%
Contribution margin ratio, Product B = Contribution margin/Sales
= 100/300
= 33.3333333333%
Average contribution margin ratio = Contribution Margin of product A x Sales of product A/Total sales + Contribution Margin of product B x Sales of product B/Total sales
= 60% x 100/400 + 33.3333333333% x 300/400
= 15% + 25%
= 40%
2)
Break even sales in dollars = Fixed cost/Average Contribution margin ratio
= 200/40%
= $500
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