Question

Which of the following statements is true?

I. If the variable expense per unit decreases, and all other factors remain the same, the contribution margin ratio will increase.
II. The smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.

A. Only statement II is true.
B. Both statements are true.
C. Only statement I is true.
D. Neither statement is true.

Answer 1

The correct answer is B.

Both statements are true.

Step-by-step explanation:

The correct answer is B. Both statements are true.

In statement I, if the variable expense per unit decreases (while all other factors remain the same), the contribution margin ratio will increase.

The contribution margin ratio is calculated by dividing the contribution margin by the total sales revenue. The contribution margin is the difference between total sales revenue and total variable expenses.

In statement II, the smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses. Fixed expenses are costs that do not vary with the level of production or sales, such as rent or salaries.