What is the effect on contribution margin if the variable cost per unit increase

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Question: What is the effect on contribution margin if the variable cost per unit increases by $5 while the selling price remains unchanged?

Options:

Correct Answer: Decreases by $5

Solution:

Contribution margin decreases by the same amount as the increase in variable cost, which is $5.

What is the effect on contribution margin if the variable cost per unit increases by $5 while the selling price remains unchanged?

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.

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