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What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?

Short Answer

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Answer

There is an inverse relationship between variable cost and contribution margin.

Step by step solution

01

What effect does an increase in sales price have on contribution margin?

If sales price increase the contribution margin will also increase, that means there is a direct relationship between sales price and contribution margin.

02

What effect does an increase in fixed costs have on contribution margin?

Increase in fixed cost does not impact contribution margin in any manner because contribution is the difference of sales price and variable cost.

03

What effect does an increase in variable costs have on contribution margin?

There is an inverse relationship between variable cost and contribution margin. If variable costs increase contribution margin will decrease.

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Most popular questions from this chapter

Question: Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

Compute Funday Parkโ€™s contribution margin ratio. Carry your computation to two decimal places. Use the contribution margin ratio approach to determine the sales revenue Funday Park needs to break even

Identifying variable, fixed, and mixed costs

Philadelphia Acoustics builds innovative speakers for music and home theater systems. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of speakers produced and sold.

1. Units of production depreciation on routers used to cut wood enclosures.

2. Wood for speaker enclosures.

3. Patents on crossover relays.

4. Total compensation to salesperson who receives a salary plus a commission based on meeting sales goals.

5. Crossover relays.

6. Straight-line depreciation on manufacturing plant.

7. Grill cloth.

8. Insurance on the corporate office.

9. Glue.

10. Quality inspectorโ€™s salary.

What are the CVP assumptions?

The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.

Before you begin this assignment, review the Tying It All Together feature in the chapter.

Best Buy Co., Inc. is a leading provider of technology products. Customers can shop at more than 1,700 stores or online. The company is also known for its Geek Squad for technology services. Suppose Best Buy is considering a particular HDTV for a major sales item for Black Friday, the day after Thanksgiving, known as one of the busiest shopping days of the year. Assume the HDTV has a regular sales price of \(900, a cost of \)500, and a Black Friday proposed discounted sales price of \(650. Best Buyโ€™s 2015 Annual Report states that failure to manage costs could have a material adverse effect on its profitability and that certain elements in its cost structure are largely fixed in nature. Best Buy, like most companies, wishes to maintain price competitiveness while achieving acceptable levels of profitability. (Item 1A. Risk Factors.)

Requirements

1. Calculate the gross profit of the HDTV at the regular sales price and at the discounted sales price.

2. Assume that during the November/December holiday season last year, Best Buy sold an average of 150 of this particular HDTV per store. If the HDTVs are marked down to \)650, how many would each store have to sell this year to make the same total gross profit as last year?

3. Relative to Sales Revenue, what type of costs would Best Buy have that are fixed? What type of costs would be variable?

4. Because Best Buy stated that its cost structure is largely fixed in nature, what might be the impact on operating income if sales decreased? Does having a cost structure that is largely fixed in nature increase the financial risk to a company? Why or why not?

5. In the Tying It All Together feature in the chapter, we looked at the cost of advertising. Is advertising a fixed or variable cost? If the company has a small margin of safety, how would increasing advertising costs affect Best Buyโ€™s operating income? What would be the effect of decreasing advertising costs?

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