Question

Brasher Company manufactures and sells a single product that has a positive contribution margin. If the selling price and variable expenses both decrease by 5% and fixed expenses do not change, then what would be the effect on the contribution margin per unit and the contribution margin ratio? A. Contribution margin per unit and margin ratio will both decrease B. Contribution margin per unit will decrease and contribution margin ratio will not change C. Contribution margin per unit will not change and contribution margin ratio will decrease D. Neither contribution margin per unit or margin ratio will not change

Answer 1

Answer:

B. Contribution margin per unit will decrease and contribution margin ratio will not change

Explanation:

The formula to compute the contribution margin per unit and the contribution margin ratio is shown below:

The Contribution margin per unit = Selling price per unit - Variable expense per unit

And, the Contribution margin ratio = (Contribution margin per unit) ÷ (selling price per unit) × 100

Let us assume that the selling price per unit is $100

And, the variable expense per unit is $50

So, the contribution margin per unit is $50

The contribution margin ratio = $50 ÷ $100 = 50%

Now if the selling price and variable expenses both decrease by 5%

So, the new selling price per unit is $95

And, the new variable expense per unit is $47.5

So, the contribution margin ratio = $47.5 ÷ $95 = 50%

Hence, the correct option is B.