Question

If the variable cost per unit goes down, a.Contribution margin increases and Break-even point increases. b.Contribution margin increases and Break-even point decreases. c.Contribution margin decreases and Break-even point decreases. d.Contribution margin decreases and Break-even point increases. e.Contribution margin decreases and Break-even point remains unchanged.

Answer 1

b. Contribution margin increases and Break- even point decreases.

Step-by-step explanation:

Variable cost refers to those costs which vary or change with the level of output produced. For example, commission on sales volume.

Fixed costs refer to those costs which remain fixed irrespective of the level of output such as factory rent.

Contribution margin refers to that revenue which a business earns to cover it's fixed costs, It is computed as follows;

Contribution margin = Sales - Variable Costs

Break even point refers to the level of sales wherein contribution margin equals fixed cost. It (in units) is computed as;

=
`(Fixed\ Costs)/(Contribution\ margin\ per\ unit)`

Thus, if the variable cost goes down, the contribution margin and contribution margin per unit shall rise.

And thus, break even point shall decrease since fixed costs remain the same.