Garth 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
A)Contribution margin per unit - INCREASES; Contribution margin ratio - INCREASES; Break-even in Units - DECREASES
B)Contribution margin per unit - NO CHANGE; Contribution margin ratio - NO CHANGE; Break-even in Units - NO CHANGE
C)Contribution margin per unit - NO CHANGE; Contribution margin ratio - INCREASES; Break-even in Units - NO CHANGE
D)Contribution margin per unit - INCREASES; Contribution margin ratio - NO CHANGE; Break-even in Units - DECREASES

Question

Quizplus · Accepted Answer

If both the selling price and variable expense per unit increase by 10%, then the contribution margin per unit (selling price - variable expense) will increase by 10%. The fixed expenses do not change, so the contribution margin ratio (contribution margin per unit / selling price) will increase as well. With an increase in contribution margin per unit, the break-even point in units (fixed expenses / contribution margin per unit) will decrease. Therefore, the correct answer is D.

Garth Company Sells a Single Product