Roller Corp sells wagon wheels for $150.. The variable costs for each wheel are $85, while the total fixed costs are $60,000. The contribution margin for 500 wheels is:
A) $75,000.
B) $32,500.
C) $42,500.
D) $10,000.
The correct answer and explanation is :
To calculate the contribution margin for 500 wheels, we first need to understand the formula for contribution margin:
[
\text{Contribution Margin per unit} = \text{Selling Price} – \text{Variable Cost per unit}
]
Then, the total contribution margin is:
[
\text{Total Contribution Margin} = \text{Contribution Margin per unit} \times \text{Number of units sold}
]
Step 1: Contribution Margin per Unit
From the problem, we know the following:
- Selling price per unit = $150
- Variable cost per unit = $85
Now, calculate the contribution margin per unit:
[
\text{Contribution Margin per unit} = 150 – 85 = 65
]
Step 2: Total Contribution Margin for 500 Wheels
Next, we multiply the contribution margin per unit by the number of units sold (500 wheels):
[
\text{Total Contribution Margin} = 65 \times 500 = 32,500
]
Conclusion:
The total contribution margin for 500 wheels is $32,500.
Thus, the correct answer is B) $32,500.
Explanation:
The contribution margin is an important metric in cost-volume-profit (CVP) analysis, as it represents the amount of money available after covering variable costs to contribute towards covering fixed costs and generating profit. By subtracting the variable cost from the selling price, you determine how much each unit contributes to covering the fixed costs. Once you calculate the contribution margin per unit, multiplying it by the total number of units gives the total contribution margin. In this case, Roller Corp’s contribution margin for 500 wheels is $32,500, meaning after covering the variable costs for those wheels, $32,500 is available to cover the fixed costs and contribute to profit.