Question

A vendor raises the price of a component of your product from $1 to $2. If you sell your product for $5, your contribution margin goes from __ to __

a) 80% to 60%
b) 75% to 60%
c) 75% to 40%
d) None of the above

Answer 1

The contribution margin goes from $4 to $3, which is a decrease of 25%.

Step-by-step explanation:

The contribution margin is calculated by subtracting the variable cost per unit from the selling price per unit. In this case, the selling price per unit is $5, and the variable cost per unit has increased from $1 to $2. Therefore, the contribution margin is reduced.

To calculate the contribution margin before the price increase, we subtract the variable cost per unit ($1) from the selling price per unit ($5), resulting in a contribution margin of $4. To calculate the contribution margin after the price increase, we subtract the increased variable cost per unit ($2) from the selling price per unit ($5), resulting in a contribution margin of $3. So, the contribution margin goes from $4 to $3, which is a decrease of 25% (1 - (3/4) = 0.25 or 25%).