Question

Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100.
Total fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses.
Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units.

What is the new (combined, overall or package) contribution margin ratio (rounded to two decimal places)?
a. 60%
b. 62%
c. 50%
d. 40%
e. 38%

Answer 1

Answer:

Option (e) is correct.

Explanation:

Jungle gyms:

Contribution margin per unit:

= Selling price - variable expenses

= $120 - $90

= $30

No. of units sold = 12,000

Tree houses:

Contribution margin per unit:

= Selling price - variable expenses

= $200 - $100

= $100

No. of units sold = 8,000

New sales mix ration = 12,000:8,000

                                   = 3:2

Contribution margin ratio:

= (Contribution ÷ Sales) × 100

= [($30 × 3) + ($100 × 2) ÷ ($120 × 3) + ($200 × 2)] × 100

= $290 ÷ $760

= 38%