Applying Contribution Margin to Find Total Costs

Steps:

• Total contribution = Profit + Fixed costs = $3000 +$5000 = $8000
• Sales = Total contribution / Contribution ratio = $8000 / 0.40 =$20000
• Variable costs = Sales × (1 - Contribution ratio) = $20000 × 0.60 =$12000
• Total costs = Fixed costs + Variable costs = $5000 +$12000 = $17000

Why B is correct:

• Total costs = Fixed costs + Variable costs, with variable costs = Sales × Variable cost ratio (60%), and sales from contribution margin formula: Contribution = Sales × 0.40.

Why the others are wrong:

• A: Assumes contribution equals profit, ignoring fixed costs in sales calculation.
• C: Misapplies ratio to profit directly, inflating variable costs slightly.
• D: Treats sales as total costs plus profit, bypassing contribution margin.

Final answer: B