Question

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.

Answer 1

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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