How is a weighted-average contribution margin ratio calculated for a multi-product firm?

How is a weighted-average contribution margin ratio calculated for a multi-product firm?

• A. The CM ratio of the single best-selling product.
• B. The sum of each product’s CM per unit times its sales mix share.
• C. The average CM per unit across all products without weighting.
• D. The fixed costs divided by total units sold.

Answer: (B)

The idea being tested is that a multi-product firm’s overall contribution margin ratio must reflect how much each product contributes to sales. To get the true weighted-average margin, you weight each product’s contribution by how much of the total sales it represents, then add them up. In practice, you take each product’s contribution margin (either per unit or as a CM ratio) and multiply by that product’s sales mix share, then sum across all products. This yields an overall margin that matches the actual sales composition, rather than relying on a single product or an simple unweighted average. Using only the best-selling product ignores the other products and their margins, so it misstates the firm’s true profitability. An unweighted average CM per unit doesn’t account for how much each product actually sells, which distorts the overall margin. Dividing fixed costs by total units sold doesn’t produce a contribution-margin ratio at all; it’s related to break-even in units, not the combined margin relative to sales.

The idea being tested is that a multi-product firm’s overall contribution margin ratio must reflect how much each product contributes to sales. To get the true weighted-average margin, you weight each product’s contribution by how much of the total sales it represents, then add them up. In practice, you take each product’s contribution margin (either per unit or as a CM ratio) and multiply by that product’s sales mix share, then sum across all products. This yields an overall margin that matches the actual sales composition, rather than relying on a single product or an simple unweighted average.

Using only the best-selling product ignores the other products and their margins, so it misstates the firm’s true profitability. An unweighted average CM per unit doesn’t account for how much each product actually sells, which distorts the overall margin. Dividing fixed costs by total units sold doesn’t produce a contribution-margin ratio at all; it’s related to break-even in units, not the combined margin relative to sales.