If the total contribution margin decreases and fixed costs do not change, pre-tax income
A) Decreases by an equal amount
B) Increases by an equal amount
C) Does not change
D) Increases by some other amount

Question

Quizplus · Accepted Answer

Contribution margin is the difference between revenue and variable costs. As the total contribution margin decreases, this means revenue has decreased or variable costs have increased. Since fixed costs remain constant, the decrease in contribution margin directly impacts pre-tax income. Therefore, pre-tax income decreases by an equal amount.

If the Total Contribution Margin Decreases and Fixed Costs Do