Question

Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.Sales $ 3,500,000Cost of sales: Direct Material $ 500,000 Direct labor 250,000 Variable Overhead 275,000 Fixed Overhead 600,000 1,625,000Gross Profit $ 1,875,000Selling and General & Admin. Exp. Variable 750,000 Fixed 250,000 1,000,000Operating Income $ 875,000The contribution margin ratio for the current year is:____________.a.) 53.6%.b.) 49.3%.c.) 46.4%d.) 25%.

Answer 1

Answer:

b. 49.3%

Explanation:

The computation of contribution margin ratio is shown below:-

For computing the contribution margin ratio first we need to find out the total contribution which is here below:-

Total Contribution = Sales - Direct Material - Direct labor - Variable Overhead - Variable

= $3,500,000 - $500,000 - $250,000 - $275,000 - $750,000

= $1,725,000

Contribution margin Ratio = Contribution ÷ Sales

= $1,725,000 ÷ $3,500,000

= 49.3%

So, for calculating the contribution margin ratio we simply divide total contribution by sales.