AMP 415 Topic 5 DQ 2.
A product’s contribution margin ratio refers to the proportion of sales dollar for the product that are available to cover the company’s profits, fixed costs, and fixed expenses. In fact, it is what remains from revenues attributed to the product after subtracting the variable expenses and costs. For instance, if a company makes cellphones that are sold at $100 per unit with a variable manufacturing cost per unit of $40 and a variable operating expenses per unit of $20, then the contribution margin per unit would be calculated as $40 ($100 – ($40 + $20)). AMP 415 Topic 5 DQ 2.
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The contribution margin ratio for the product would be 0.4 ($40/$100), telling us that 40% of the revenue realized from the sale of each unit will be available to cover the fixed expenses and fixed costs. Once the fixed expenses and fixed costs have been covered, the 40% of the revenue from each product unit will be added to the net income. AMP 415 Topic 5 DQ 2.
The contribution margin ratio is important in planning business operations. The ratio shows how the variable costs and variable expenses relate to each product revenue. A positive ratio indicates that the revenue for that product exceeds the variable costs and variables expenses, thus showing that it is profitable. This means that if the company focuses on producing and selling more of the products with larger positive ratios, then it will report higher profits. AMP 415 Topic 5 DQ 2. On the other hand, a negative ratio indicate that the variable costs and variable expenses exceed the revenue for that product, thereby showing that the product is not profitable. Increasing the production and sale of products with negative ratios will result in the company reporting higher losses. As a result, the contribution margin ratio is important in planning business operations by showing the profits and loses expected from each product thus identifying a production plan that will realize the desired profits. AMP 415 Topic 5 DQ 2.