Variable Cost Ratio, Contribution Margin Ratio

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Fixed factory overhead is $20,000 and fixed selling and administrative expense is $29,500.

Required:

1. Calculate the variable cost ratio.
%

2. Calculate the contribution margin ratio.
%

Instructions are listed below.

Explanation:

Giving the following information:

Head-First Company plans to sell 5,000 bicycle helmets at $75 each in the coming year. The unit variable cost is $45. Fixed factory overhead is $20,000 and fixed selling and administrative expense is $29,500.

To calculate the variable cost ratio, we need to use the following formula:

Variable cost ratio= unitary variable cost / selling price

Variable cost ratio= 45/75= 0.6

The contribution margin rate is the difference between the contribution margin and the selling price:

CM ratio= Contribution margin / selling price

CM ratio= (75 - 45)/ 75= 0.4

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