Flower Company sells a single product. If the selling price per unit and the variable expense per unit both increase by 10% and fixed expenses do not change, then:

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Quizplus · Accepted Answer

CWhen both the selling price per unit and the variable expense per unit increase by 10%, the contribution margin per unit (selling price - variable expense) increases because the selling price, which is higher, increases by a larger absolute amount than the variable expenses. Fixed expenses remaining unchanged means the contribution margin ratio improves, but to cover the unchanged fixed expenses with a higher contribution margin per unit, fewer units need to be sold, theoretically. However, because the selling price has increased, the actual effect on breakeven in units depends on the relative changes in contribution margin and selling price. If the contribution margin increases, it typically means you need to sell fewer units to break even, but because both prices and costs are increasing, the actual breakeven point in units could increase or decrease depending on the specific numbers. The increase in breakeven units in this choice assumes a context where the increase in selling price does not offset the increase in contribution margin per unit sufficiently to reduce the breakeven volume, which might not always be the case. Therefore, the more accurate correction to my explanation is that the breakeven point in units could change in either direction, depending on the relative changes in selling price and variable costs, but the contribution margin per unit definitely increases if both selling price and variable costs increase by the same percentage and fixed costs remain constant.

Flower Company Sells a Single Product