What is the 'contribution-sales ratio' where a Selling price per unit of $99, a Variable cost per unit of $66 and a Fixed costs of $495,000 are givenThe details of the question is as follows: The...

What is the 'contribution-sales ratio' where a Selling price per unit of $99, a Variable cost per unit of $66 and a Fixed costs of $495,000 are given

The details of the question is as follows: The directors of Upholland Ltd are planning for the launch of a new electronic game and are considering selling this new game for a Selling price per unit of $99. It anticipates that the Variable cost per unit will be $66 and the Fixed costs attributable to this product are $495,000. The directors have not factored in any risks in their estimation of selling price and costs. (QUESTION). What is the contribution-sales ratio and its meaning?

Asked on by emychris

3 Answers | Add Yours

justaguide's profile pic

justaguide | College Teacher | (Level 2) Distinguished Educator

Posted on

The contribution sales or C/S ratio = (Sales revenue - Variable cost of sales)/Sales revenue x 100

Here, the sales revenue is $99 and the variable costs are $66. This gives the C/S ratio as (99 - 66)/66% = 50%

From the C/S ratio of 50%, we can infer that if the sales were to increase by $1, the increase in net operating income would be 50 cents.

The profits earned by the company is equal to the Total Sales*(C/S ratio) - Fixed costs

As the fixed cost required for this product is $450000, the company would break even when the sales are equal to $450000*2 = $900000.

If a company has a high C/S ratio, the net operating income is also impacted by a large extent if there is a change in the sales revenue.

Sources:
bigakof's profile pic

bigakof | Student, Undergraduate | eNotes Newbie

Posted on

BREAK-EVEN=FIXED COST/CONTRIBUTION

CONTRIBUTION=SALES PER UNITS-VARIABLE COST PER UNITS

=     $99-$66

=       $33

BREAK-EVEN=  $495000/$33

=15000 UNNITS

THE BREAK EVEN VALUE =BREAK-EVEN IN UNITS *SALES PERUNIT

=$99*15000

=$1485000

 

emychris's profile pic

emychris | Student, Undergraduate | (Level 1) eNoter

Posted on

Thanks for the answer provided. But there is still more to the question.

1) what will be the break-even point in units and value

2) Profit or loss if sales were 25,000 units and £1,386,000

3) Sales revenue required to give a profit of £264,000.

4) Margin of safety if the sales were as in (2) and (3)

We’ve answered 318,968 questions. We can answer yours, too.

Ask a question