If the unit contribution margin is $500 and the contribution margin percentage is 25%, the selling price is ____________?
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Answer: A. $2,000
Explanation
Selling price is determined by dividing unit contribution margin by contribution margin percentage. Dividing five hundred dollars by twenty-five percent results in two thousand dollars total price. This relationship links unit profitability directly to the overall selling price of the product. Contribution margin percentage represents the proportion of revenue remaining after variable costs. Unit contribution margin measures the dollar amount each sale contributes toward covering fixed costs. Pricing models often utilize target contribution ratios to ensure adequate operational profitability levels.
Retailers and manufacturers use contribution ratios to evaluate product line profitability quickly. Sales managers analyze selling prices to ensure revenue covers both variable and fixed expenses. Pricing strategies depend on understanding how contribution margins impact overall corporate earnings. Option B incorrectly calculates the ratio by applying a flawed mathematical adjustment. Option C represents an arbitrary figure unrelated to the given contribution margin percentage. Option D underestimates the selling price by reversing the standard formula calculation steps.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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