Question

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be: Multiple Choice 30% 60%, 40%. IO%. 70%.

Answer 1

If Forrester Company purchases this equipment:

Selling Price will remain constant at $100 but variable costs per unit will decrease by $10

Selling Price = $100
Variable Costs per unit = $70 - $10
Variable Costs per unit = $60

Contribution Margin Ratio = (Selling Price - Variable Costs per unit) / Selling Price
Contribution Margin Ratio = ($100 - $60) / $100
Contribution Margin Ratio = $40 / $100
Contribution Margin Ratio = 40%

So, revised contribution margin ratio would be 40%