What is the effect on contribution margin if variable costs increase by $20 whil

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Question: What is the effect on contribution margin if variable costs increase by $20 while the selling price remains the same?

Options:

Correct Answer: Decrease by $20

Solution:

If variable costs increase by $20, the contribution margin decreases by $20.

What is the effect on contribution margin if variable costs increase by $20 while the selling price remains the same?

What is the effect on contribution margin if variable costs increase by $20 while the selling price remains the same?

Step 1: Understand what contribution margin is. It is the selling price minus variable costs.
Step 2: Identify the selling price. In this case, the selling price remains the same.
Step 3: Recognize that variable costs are increasing by $20.
Step 4: Calculate the new contribution margin. Since variable costs increase by $20, the contribution margin will decrease by the same amount.
Step 5: Conclude that if variable costs increase by $20, the contribution margin decreases by $20.

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