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  • 1.  CVP question-can someone explain

    Posted 12-13-2019 12:58 AM
    Ticker Company sells two products. Product A provides a contribution margin of $3 per unit, and Product B provides a contribution margin of $4 per unit. If Ticker's sales mix shifts toward Product A, which one of the following statements is correct?



    *Source: Retired ICMA CMA Exam Questions.
    As the sales mix shifts towards a product with a lower contribution margin, operating income will decrease if the total number of units sold remains constant.


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    Syed Yousuf Jamal

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  • 2.  RE: CVP question-can someone explain

    Posted 12-13-2019 09:54 AM
    Good morning,

    "The contribution margin is computed as the selling price per unit, minus the variable cost per unit. Also known as dollar contribution per unit, the measure indicates how a particular product contributes to the overall profit of the company. It provides one way to show the profit potential of a particular product offered by a company and shows the portion of sales that helps to cover the company's fixed costs. Any remaining revenue left after covering fixed costs is the profit generated."

    If the sales mix shifts to the product with the lower contribution margin, you would need to sell more of this product to break even.  If the same number of units sold remain constant, then the overall net income is going to decrease because more units with the lower contribution margin were sold.  I don't think the contribution ratio would change in this scenario, but with more sales of the product with lower contribution margin, I would rule out the ratio going up.  Also, with the information given, I would not think that the Product B margin ratio would change.  I would have picked operating income will decrease if the total number of units sold remain constant.

    Hope this helps. 

    Rebecca



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