Question

Flower Company manufactures and sells a single product that has a positive contribution margin. If the selling price and variable costs both decrease by 5% and fixed costs do notchange, then what would be the effect on the contribution margin per unit and the contribution margin ratio?

Contribution margin per unit Contribution margin ratio
A. Decrease Decrease
B. Decrease No change
C. No change Decrease
D. No change No change

Option A
Option B
Option C
Option D

Answer 1

A 5% reduction in both selling price and variable costs causes a decrease in the contribution margin per unit since the selling price and variable costs fall by the same dollar amount, but the contribution margin ratio remains the same because the percentage decrease is the same for both variables.

Step-by-step explanation:

When analyzing the effects of a 5% decrease in both selling price and variable costs on a product's contribution margin per unit and the contribution margin ratio, which are key concepts in managerial accounting especially relevant in a perfectly competitive market, certain equations become prominent.

The contribution margin per unit is calculated by subtracting the variable cost per unit from the selling price per unit. When both the selling price and the variable cost decrease by the same percentage and fixed costs remain unchanged, the contribution margin per unit will decrease because the dollar reduction in selling price will be equivalent to the dollar reduction in variable costs, thus lowering the contribution margin.

On the other hand, the contribution margin ratio, which is the contribution margin per unit divided by the selling price per unit, will not change because the percentage decrease in selling price is proportionally the same as the reduction in variable costs, keeping the ratio constant. Therefore, the correct answer is B. Decrease No change.