Question

s the contribution margin ratio of a grocery store likely to be higher or lower than that of a plastics manufacturer? Explain the difference in cost structure between a grocery store and a plastics manufacturer. How does the cost structure difference impact operating risk?

Answer 1

Contribution margin ratio : It is the ratio of contribution to sales.

Contribution = Sales - Variable costs

Therefore, if the variable cost are lower then it is likely to have greater contribution margin ratio And if the variable costs are higher then the contribution margin will be lower .

Now , In case of grocery store the variable costs are likely to be less than the plastic manufacturer .

so, the contribution margin ratio of grocery store is likely to be higher than plastic manufacturer .

Difference in the cost structure between a grocery store and a plastics manufacturer:

A plastic manufacturee inculdes cost such as direct material , direct labor , direct manufactimng overhead where as the grocery store includes cost such as selling expenses , sales salaries, marketing and commision expenses, administrative expenses etc.

Operating Risk is less for companies with less fixed costs to cover because there will be fewer risk for loss if sales deline.

Operating risk for Grocery store is higher as compared to plastics manufacturer.