Question

When sales units go up by 25% (assuming the unit selling price and unit variable expense are constant): A. Variable expenses go up by 25%. B. Net income will go up by 25%. C. Fixed expenses will go up by 75%. D. Contribution margin will go up by 75%.

Answer 1

Answer: A. Variable expenses go up by 25%.

Explanation:

Total variable expenses are calculated on the basis of the entire units to be sold which means that if sales units were to increase by 25%, the total variable expenses will increase by 25% as well.

For instance, If selling price per unit is $4 and variables, $3 and the number of units to be sold is 20, sales will be $80 and variable costs will be $60.

Assuming units went up by 25% to 25 units, variable costs would be; $75 which is an increase of;

= (75 - 60) / 60

= 25%