Q2021RQ - Horngren'S Financial And Managerial Accounting

Question

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

Step-by-Step Solution

Answer

Answer

 

There is an inverse relationship between variable cost and contribution margin.

Step 1: What effect does an increase in sales price have on contribution margin?

If sales price increase the contribution margin will also increase, that means there is a direct relationship between sales price and contribution margin.

Step 2: What effect does an increase in fixed costs have on contribution margin?

Increase in fixed cost does not impact contribution margin in any manner because contribution is the difference of sales price and variable cost.

Step 3: What effect does an increase in variable costs have on contribution margin?

There is an inverse relationship between variable cost and contribution margin. If variable costs increase contribution margin will decrease.