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    CindyJ's Avatar
    CindyJ Posts: 2, Reputation: 1
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    #1

    Mar 17, 2007, 12:11 PM
    Variable Costs
    If the contribution margin is $150,000 and the contribution ratio is 30% what is the total variable cost? :confused:
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    Mar 17, 2007, 05:00 PM
    Basic Formulas:
    1) Contribution Margin = Sales – VC
    2) CM Ratio = (Sales-VC) / Sales


    CM = Sales – VC
    Let x = Sales and therefore x-150,000 is VC

    CM = x – (x-150,000)
    CM = x-x + 150,000
    CM = 150,000

    CM Ratio = [x – (x-150,000)] / x
    CM Ratio = [x-x-+150,000] / x
    CM Ratio = 150,000 / x
    We know CM Ratio is .3
    .30 = 150,000 / x
    x = 150,000 / .3
    x = 500,000

    Therefore, Sales are $500,000 and therefore VC must be $350,000 (500,000-350,000)

    And now, to verify our numbers…

    1) Contribution Margin = Sales – VC
    CM = 500,000 – 350,000 = 150,000

    The question told us we have a CM of 150,000

    2) CM Ratio = (Sales-VC) / Sales
    CM Ratio = (500,000 – 350,000) / 500,000
    CM Ratio = 150,000 / 500,000
    CM Ratio = 0.3

    The question told us we have a CM Ratio of .3 (or 30%)
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