What is the effect on contribution margin if the variable cost per unit increase
Practice Questions
Q1
What is the effect on contribution margin if the variable cost per unit increases by $5 while the selling price remains unchanged?
Increases by $5
Decreases by $5
Remains the same
Increases by $10
Questions & Step-by-Step Solutions
What is the effect on contribution margin if the variable cost per unit increases by $5 while the selling price remains unchanged?
Step 1: Understand what contribution margin is. It is the selling price minus the variable cost per unit.
Step 2: Identify the selling price. In this case, the selling price remains unchanged.
Step 3: Identify the initial variable cost per unit. Let's call it 'X'.
Step 4: Calculate the initial contribution margin using the formula: Contribution Margin = Selling Price - Variable Cost. This gives us: Contribution Margin = Selling Price - X.
Step 5: Now, the variable cost increases by $5. So, the new variable cost is 'X + 5'.
Step 6: Calculate the new contribution margin using the updated variable cost: New Contribution Margin = Selling Price - (X + 5).
Step 7: Compare the initial contribution margin and the new contribution margin. The new contribution margin is less by $5 than the initial contribution margin.
Step 8: Conclude that the contribution margin decreases by $5 due to the increase in variable cost.
