What happens to the contribution margin if the selling price increases while variable costs remain constant?
Practice Questions
1 question
Q1
What happens to the contribution margin if the selling price increases while variable costs remain constant?
Decreases
Increases
Remains the same
Becomes negative
If the selling price increases while variable costs remain constant, the contribution margin increases.
Questions & Step-by-step Solutions
1 item
Q
Q: What happens to the contribution margin if the selling price increases while variable costs remain constant?
Solution: If the selling price increases while variable costs remain constant, the contribution margin increases.
Steps: 7
Step 1: Understand what contribution margin is. It is the selling price minus the variable costs.
Step 2: Identify the selling price and variable costs. Let's say the selling price is 'P' and variable costs are 'VC'.
Step 3: Write the formula for contribution margin: Contribution Margin = Selling Price (P) - Variable Costs (VC).
Step 4: If the selling price increases, let's say it becomes 'P + increase'.
Step 5: Substitute the new selling price into the formula: New Contribution Margin = (P + increase) - VC.
Step 6: Compare the new contribution margin with the old one: New Contribution Margin > Old Contribution Margin because the increase in selling price adds to the margin.
Step 7: Conclude that if the selling price increases while variable costs remain constant, the contribution margin increases.
