Final answer:
The contribution margin ratio decreases when variable costs increase and the selling price remains constant because the margin between cost and price shrinks. Fixed costs or breakeven points do not directly affect this outcome, but price levels relative to variable costs are key factors for operational decisions.
Step-by-step explanation:
The contribution margin ratio always decreases when the variable costs increase and the selling price remains constant. This is because the contribution margin is defined as the selling price per unit minus the variable cost per unit. When variable costs rise while the selling price stays the same, there is a smaller margin between the selling price and the variable costs, thus reducing the contribution margin ratio. It's important to note that fixed costs do not directly impact the contribution margin ratio, and changes in the selling price or breakeven point do not necessarily result in a decreased margin ratio.
For instance, if average variable cost (AVC) is less than the market price, a firm will cover its variable costs and contribute to fixed costs, even if it's operating at a loss. However, if the price falls below AVC, it may be more advantageous for a firm to shut down temporarily as it will then only incur fixed costs instead of both fixed and additional variable costs. Thus, understanding where price equals marginal cost (MR=MC) is crucial for maximizing profits or minimizing losses.