Contribution Margin Analysis Quiz

The contribution margin ratio represents the percentage of each sales dollar that contributes to covering fixed costs and generating profit. It is calculated as (Contribution Margin / Sales). For Flight 137, the contribution margin ratio is 70%, meaning that 70 cents from every dollar of revenue contributes towards covering fixed costs and generating profit.

The total variable cost is the sum of all variable costs associated with an activity. In the case of Flight 137, the total variable cost is $1,540,000. Variable costs are costs that change directly with the level of activity.

The increase in contribution margin is the difference between the contribution margin earned if the flight continues to operate and the contribution margin earned if the flight is discontinued. This increase arises because the variable costs associated with Flight 137 would be eliminated if the flight is discontinued. For Flight 137, the increase is $162,000, reflecting the reduction in variable costs.

The fixed costs that remain with the company after a segment is discontinued are called unavoidable fixed costs. The remaining fixed costs no longer incurred are the fixed costs that are directly attributable to the discontinued segment. In this case, 76% of the segment's fixed costs are unavoidable, leaving $164,080 as the remaining fixed costs no longer incurred.

Operating income is the profit generated from the core operations of a business. When Flight 137 is discontinued, the operating income increases by $132,000. This increase is due to the elimination of variable costs and the reduction of fixed costs.