Last year, variable expenses were 60% of total sales and fixed expenses were 10% of total sales. If the company increases its selling prices by 10%, but if fixed expenses, variable costs per unit, and unit sales remain unchanged, the effect of the increase in selling price on the company's total contribution margin would be:

Question

Quizplus · Accepted Answer

The contribution margin increases by the percentage increase in selling price because fixed expenses and variable costs per unit remain unchanged. Since variable expenses are 60% of sales, the contribution margin is 40% of sales. A 10% increase in selling price increases the contribution margin by 10% of 40%, which is a 25% increase in the contribution margin.

Last Year, Variable Expenses Were 60% of Total Sales and Fixed