Question

if the fixed costs for a product increase and the variable costs (as a percentage of sales dollars) increase, what will be the effect on the contribution margin ratio and the breka0even point

Answer 1

Answer: Contribution Margin will DECREASE

Breakeven point will INCREASE

Explanation:

Contribution margin = Sales - Variable costs

The Contribution margin is calculated by subtracting the Variable costs from sales. If the Variable costs increase therefore, the contribution margin will decrease.

Breakeven = Fixed Assets / Contribution margin per unit

The Breakeven point can be calculated by dividing the Fixed Assets by the contribution margin per unit. As we saw from above, the Contribution margin has decreased and now the Fixed assets have increased as well. This will lead to a situation where the Numerator increases and the denominator decreases. The Breakeven point will therefore increase.