Final answer:
A. not change.
If Skyways Company increases its selling price by 10%, the variable cost ratio will not change because the variable costs are based on a percentage of the selling price. Thus, both the costs and the selling price increase proportionally, keeping the ratio the same.
Step-by-step explanation:
The subject of the question is the effect of a price increase on the variable cost ratio for Skyways Company. Currently, Skyways sells its product for $15, with variable costs being 70% of the selling price.
If Skyways increases its selling price by 10%, the new selling price will be $15 + 10% of $15, which is $16.50. However, since the variable costs are a percentage of the selling price, they also increase. The variable costs, which were $10.50 (70% of $15), will now be $11.55 (70% of $16.50).
The variable cost ratio is calculated as variable costs divided by the selling price. Originally, this ratio is $10.50 / $15 = 0.7 or 70%. After the increase, the ratio will be $11.55 / $16.50, which simplifies to approximately 0.7 or 70% again.
Therefore, the correct answer is:
A. not change.
If Skyways increases its selling price by 10%, its variable cost ratio will decrease. The variable cost ratio is calculated as variable costs divided by selling price.
Currently, variable costs are estimated to be 70% of the selling price. If the selling price increases by 10%, the new selling price would be $15 + 10% = $16.50. Therefore, the new variable costs would be 70% of $16.50, which is $11.55.