Final answer:
When variable costs increase, the contribution margin per unit decreases, affecting profitability, as the amount left over from sales to cover fixed costs and profits is reduced.
Step-by-step explanation:
When the unit selling price remains the same and variable costs increase, then the contribution margin per unit decreases. The contribution margin is calculated by subtracting variable costs from the selling price. Variable costs are tied directly to the production of goods or services, such as labor and raw materials. When these costs go up without a corresponding increase in the selling price, the amount of money left over from each sale to contribute to fixed costs and profits (the contribution margin) becomes smaller.
If a company experiences higher variable costs without adjusting the product's price, profitability will suffer. It is crucial to understand this concept to maintain healthy profit margins and make informed decisions regarding production and pricing strategies.