Question

1. The contribution margin per unit increases due to:

A.   increase in selling price

B.   decrease in selling price

C. increase in variable costs

D.   decrease in fixed costs

Answer 1

Contribution margin

Contribution margin per unit is calculated by subtracting variable cost per unit from selling price. Following is the formula used to find variable cost per unit.

Contribution margin per unit = selling price - variable costs per units

Option A increase in selling price

Increase in selling price increase the contribution margin per unit.

For example selling price 10 variable cost 4

Contribution margin per unit = 10 - 4 = 6

Selling price increase to 12

Contribution margin per unit = 12 - 4 = 8

The above calculations clearly show that increase in selling price increase the contribution margin per unit.

Option B Decrease in selling price

Decrease in selling price decrease the contribution margin per unit.

For example selling price 10 , variable cost 4

Contribution margin per unit = 10 - 4 = 6

Selling price decrease to 8

Contribution margin per unit = 8 - 4 = 4

The above calculations show that decrease in selling decrease the contribution margin per unit.

Option C increase in variable costs

Increase in variable cost decrease the contribution margin.

For example selling price 10 , variable cost 4

Contribution margin per unit = 10 - 4 = 6

Variable cost increase to 6

Contribution margin per unit = 10 - 6 = 4

The above example clearly indicate that increase in variable cost decrease the contribution margin per unit.

Option D decrease in fixed cost

Contribution margin per unit is calculated by subtracting variable costs per units from selling price. Decrease in fixed cost doesn't change the contribution margin per unit.

Option A is correct. Increase in selling price increase the contribution margin per unit.

The example and explanations clearly indicate that other options are incorrect.

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