Final answer:
The decrease in fixed costs and variable costs leads to an increase in the contribution margin ratio and a decrease in the break-even point, corresponding to answer option B.
Step-by-step explanation:
When a company experiences a decrease in fixed costs and a decrease in variable costs (as a percentage of sales dollars), the contribution margin ratio will increase. The contribution margin ratio is calculated by subtracting variable costs per unit from the selling price per unit and then dividing the result by the selling price per unit. A decrease in variable costs per unit will result in a higher contribution margin per unit, and if fixed costs also decrease, a smaller ratio of sales will be needed to cover those fixed costs, improving the contribution margin ratio.
Conversely, the break-even point, which is the amount of sales needed to cover all costs, will decrease, because it costs less to produce each unit (due to decreased variable costs), and it requires fewer sales to cover the lower fixed costs. Therefore, the company will reach its break-even point at a lower level of sales.
The correct answer is B: The contribution margin ratio will increase, and the break-even point will decrease.