Belton Company currently sells its products for $25 per unit. Management is contemplating a 20% increase in the sales price for next year. Variable costs are currently 30% of sales revenue and are not expected to change next year. Fixed expenses are $150,000. If fixed costs were to decrease 10% during the current year, contribution margin would do what?
A) Increase 10%
B) Remain the same
C) Impossible to determine with the given data
D) Decrease 10%

Question

Quizplus · Accepted Answer

The contribution margin is calculated as sales revenue minus variable costs. Since the variable costs are a percentage of sales revenue and this percentage does not change with the decrease in fixed costs, the contribution margin ratio remains the same. The decrease in fixed costs does not affect the contribution margin, only the net income.

Belton Company Currently Sells Its Products for $25 Per Unit