Business Degree Certification Practice Test

What is the contribution margin when sales are $920,000 and fixed costs are $160,000?

1. 30 percent

2. 40 percent

3. 50 percent

4. 60 percent

The correct answer is: 30 percent

To determine the contribution margin, it is helpful to first understand what the contribution margin represents. The contribution margin is calculated using the formula: Contribution Margin = (Sales - Variable Costs) / Sales However, to back into the contribution margin based solely on sales and fixed costs when variable costs are not provided, we can look at the arrangement of the question. In this situation, while we need variable costs to find the exact contribution margin percentage, we can estimate the contribution margin relative to the fixed costs. Given that fixed costs are $160,000, let's represent the contribution margin ratio (as a percentage) as follows: If we denote total profit (or loss) as the difference between sales and total costs (which consist of fixed and variable costs), we recognize that contribution margin must cover fixed costs to reach a break-even point. In a scenario where sales are $920,000 and the required contribution margin must address fixed costs and any profit generated, we can intuitively consider how much of the sales must be used to cover fixed costs. If we take the total sales of $920,000 and subtract the fixed costs of $160,000, that gives us a contribution towards covering variable costs and generating profit of $760,000. To