Which of the following is true of a contribution margin ratio?
A) If the contribution margin ratio increases, the variable cost ratio decreases
B) It is the proportion of each sales dollar available to cover variable costs.
C) It is complementary to the net profit ratio.
D) If the contribution margin ratio increases, the price must have decreased.
E) If the contribution margin ratio increases, more units must be sold to break even.

Question

Quizplus · Accepted Answer

The contribution margin ratio represents the portion of each sales dollar that contributes to covering fixed costs and generating profit, after variable costs are deducted. If the contribution margin ratio increases, it means a larger portion of sales revenue is available after covering variable costs, which implies that the variable cost ratio (variable costs as a percentage of sales) decreases. This is because the two ratios are inversely related; as one goes up, the other goes down.

Which of the Following Is True of a Contribution Margin