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

Practice Questions

Q1
What is the effect on contribution margin if variable costs increase by $20 while the selling price remains the same?
  1. Increase by $20
  2. Decrease by $20
  3. No effect
  4. Increase by $40

Questions & Step-by-Step Solutions

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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