Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) (increase/decrease) of $ . (Enter either increase or decrease and the dollar amount as a whole number.)

Question

contestada

Respuesta :

andromache andromache · Answer 1 · 2019-10-05T12:38:56+02:00

Answer:

The contribution margin decrease by $3,000

Explanation:

In this question, we have to apply the contribution margin formula which is shown below:

Contribution margin = Sales - variable cost

Where,

Sales = Selling price per pillow × number of pillows sold

= $25 × $1,200

= $30,000

And, the variable cost = Variable cost per pillow × number of pillows sold

= $15 × $1,200

= $18,000

So, the contribution margin equals to

= $30,000 - $18,000

= $12,000

Now due to material improvement,

The new Sales = Selling price per pillow × updated number of pillows sold

= $25 × $1,500

= $37,500

And, the variable cost = Variable cost per pillow × updated number of pillows sold

= $15 × $1,500

= $22,500

So, the new contribution margin equals to

= $37,500 - $22,500

= $15,000

So, the contribution margin decrease by $3,000 ($15,000 - $12,000)