Answer (D) is correct . Prime costs are direct materials and direct labor. These two elements totaled $28 ($16 + $12) before the increase, so the new total is $33.60 ($28 ¡Á 1.2). In other words, prime costs increases by $5.60, and total variable costs increase to $45.60. Subtracting $45.60 from the $60 selling price leaves a contribution margin of $14.40. The contribution margin percentage thus becomes 24% ($14.40 ¡Â $60).Answer (A) is incorrect because This is the contribution margin percentage that results from including manufacturing overhead as a prime cost. Answer (B) is incorrect because The contribution margin percentage that results from dividing total variable costs by the sales price is 76% ($45.60 ¡Â 60). Answer (C) is incorrect because This is the contribution margin percentage that results from treating all variable costs as prime costs.
|