Chang Corporation has two divisions, T and W. The company's overall contribution margin ratio is 40%, with sales in the two divisions totaling $900,000. If variable expenses are $200,000 in Division T and if Division W's contribution margin ratio is 20%, the sales in Division w must be: a. $700,000 b. $200,000 c. $340,000 d. $425,000

B) $425,000

Explanation:

The calculation for finding the sales in Division W is given below,

                                Total Company  Division T  Division W

Sales              $900,000  

Variable expenses                 200,000  

Contribution margin           ?  

Contribution margin = CM ratio × Sales = 0.40 × $900,000 = $360,000

                               Total Company  Division T  Division W

Sales                $900,000  

Variable expenses         ?      200,000  

Contribution margin$360,000  

Contribution margin = Sales – Variable expenses

$360,000 = $900,000 – Variable expenses

Variable expenses = $900,000 – $360,000 = $540,000

                          Total Company   Division T   Division W

Sales              $900,000  

Variable expenses      540,000   200,000        ?

Contribution margin  $360,000  

Total variable expenses = Division T variable expenses + Division T variable expenses

$540,000 = $200,000 + Division T variable expenses

Division T variable expenses = $540,000 – $200,000 = $340,000

                       Total CompanyDivision TDivision W

Sales               $900,000                                 ?

Variable expenses      540,000           200,000340,000

Contribution margin   $360,000  

CM ratio = 1 – Variable expense ratio

0.20 = 1 – Variable expense ratio

Variable expense ratio = 1 – 0.20 = 0.80

Variable expense ratio = Variable expenses ÷ Sales

0.80 = $340,000 ÷ Sales

Sales = $340,000 ÷ 0.80 = $425,000

The sales in Division W must be $425,000 .

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