Question

Next year, Celebrity wishes to increase the unit selling price to $110. Sales commissions will change to 2.5% of sales. Cost of goods sold per unit, fixed costs, and sales volume will remain the same. How will these changes affect contribution margin and net income?

Answer 1

Celebruity has a unit contribution margin of $35 ($100-$62-$3), currently.

Celebrity will have a unit contribution margin of $42.25 =($110-$62-$2.75) whit the changes.

This is an increase of $10.25 in the unit contribution margin.

Sales volume remains to be the same at 150 units ($15000 / $100), so the effect on contribution margin is $1537.50 = (150 X $10.25).

The contribution margin increase equals the net income increase, $1537.5 because the costs remain the same