Question

Alpine Thrills Ski Company recently expanded its manufacturing capacity. The firm will now be able to produce up to 35,000 pairs of cross-country skis of either the mountaineering model or the touring model. The sales department assures management that it can sell between 29,000 and 33,000 units of either product this year. Because the models are very similar, the company will produce only one of the two models.

The following information was compiled by the accounting department.

	Model
	Mountaineering			Touring
Selling price per unit	$	152.00		$	140.00
Variable costs per unit		89.20			89.20

Fixed costs will total $634,400 if the mountaineering model is produced but will be only $535,200 if the touring model is produced. Alpine Thrills Ski Company is subject to a 35 percent income tax rate.

Required:

1. Compute the contribution-margin ratio for the touring model.

Answer 1

Contribution Margin Ratio

The contribution margin ratio is the difference between a company's sales and variable expenses, expressed as a percentage of Sale

Formula is as follows-

(Sales - Variable expenses) ÷ Sales (in percentage terms)

In the given question touring model has a selling price of $140 per unit and variable cost is $89.20 per unit

Ratio is calculated as follows- (140-89.20)÷140 = 36.29%

Notes-

1. Contribution margin ratio is not affected by quantity produced

2. Contribution margin ratio is not affected by Fixed cost

3. Contribution margin ratio is not affected by tax rate