Question

The contribution margin ratio always decreases when the:

a) Break even point decreases
b) Fixed expenses increase
c) Selling price increases and the variable costs remain constant
d) Variable cost increases and the selling price remainds constant

Answer 1

The contribution margin ratio always decreases when the Fixed expenses increase.Thus option B is the correct option.

Step-by-step explanation:

The contribution margin ratio is calculated as follows:

[ text{Contribution Margin Ratio} = left( frac{text{Selling Price} - text{Variable Cost}}{text{Selling Price}} right) times 100 ]

When fixed expenses increase (( uparrow text{Fixed Expenses} )), the numerator of the contribution margin ratio remains constant, but the overall ratio decreases as it is now divided by a larger total (selling price). This leads to a lower contribution margin ratio, indicating a reduced percentage of sales available to cover fixed expenses and contribute to profit.

Additionally, this reduction is not offset by changes in variable costs or selling prices, as the other options suggest. Therefore, option **b) Fixed expenses increase is the correct choice.

In practical terms, a higher fixed expense means that a larger portion of sales is needed just to cover these costs, leaving less for covering variable costs and contributing to profit. This emphasizes the importance of managing fixed expenses efficiently to maintain a healthy contribution margin ratio and overall profitability.

Therefore option B is the correct option.