Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be: Multiple Choice 30%. 60%. 40%. 10%. 70%.

Question

Dale Stout

Business

3 January, 15:00

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be: Multiple Choice 30%. 60%. 40%. 10%. 70%.

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Buchanan · Answer 1

40%

Explanation:

The computation of the revised contribution margin ratio is shown below:

Contribution margin per unit = (Selling price per unit - variable cost per unit) : Selling price per unit

where,

Selling price per unit is $100 per unit

And, the variable cost per unit is

= $70 - $10

= $60 per unit

So, the revised contribution margin ratio is

= ($100 - $60) : 100

= 40%