Calculating Contribution Margin Ratio for Sheffield Corp.

What is Sheffield Corp.'s contribution margin ratio?

A. 55%

B. 45%

C. 66%

D. 34%

Answer:

The correct answer is option (B). Sheffield Corp's contribution margin ratio is 45%.

Sheffield Corp.'s contribution margin ratio is 45%.

The contribution margin ratio is a crucial financial metric used to evaluate a company's profitability. To calculate the contribution margin, we deduct total variable costs from the sales revenue.

In this case, Sheffield Corp.'s total variable costs consist of direct materials, direct labor, and other variable costs, which add up to $560,000 + $56,000 = $616,000.

To find the contribution margin, we subtract the total variable costs from the sales revenue:

$1,120,000 - $616,000 = $504,000.

Next, we calculate the contribution margin ratio by dividing the contribution margin by the sales revenue and expressing it as a percentage:

($504,000 / $1,120,000) x 100% ≈ 0.45 x 100% ≈ 45%.

Therefore, Sheffield Corp.'s contribution margin ratio is 45%, as indicated in option (B).

The contribution margin ratio represents the proportion of each sales dollar that contributes towards covering fixed costs and generating profits.

In this case, for every dollar in sales revenue, $0.45 remains after deducting variable costs to contribute towards covering fixed costs and yielding profits.

A higher contribution margin ratio is desirable as it indicates that a larger portion of sales revenue is available to cover fixed expenses and potentially generate more profits.

Conversely, a lower contribution margin ratio suggests that a significant portion of each sales dollar is consumed by variable costs, leaving less to cover fixed expenses and affecting overall profitability.

Hence, option (B) - 45% is the correct answer.