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Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.24. The average fixed expense per month is $1,600. An average of 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch?

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Answer:

The contribution margin ratio for Coffee Klatch is 83%.

Explanation:

Given that Coffee Klatch is an espresso stand in a downtown office building, and the average selling price of a cup of coffee is $ 1.49 and the average variable expense per cup is $ 0.24, and the average fixed expense per month is $ 1,600, to determine what is the CM Ratio for Coffee Klatch if an average of 2,100 cups are sold each month, the following calculation must be performed:

Contribution margin ratio: (sales - variable costs) / sales

((2,100 x 1.49) - (2,100 x 0.24)) / (2,100 x 1.49) = X

(3.129 - 504) / 3.129 = X

2.625 / 3.129 = X

0.83 = X

Thus, the contribution margin ratio for Coffee Klatch is 83%.

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