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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: What is target profit?

Complete the table below for the missing amounts:

A B C

Number of units 2,064 units (d) 2,570 units

Sales price per unit \( 250 \) 125 $ (g)

Variable costs per unit (a) 50 4,528

Contribution margin per unit 125 (e) (h)

Total contribution margin (b) 1,567,500 (i)

Contribution margin ratio (c) (f) 20%

Calculating contribution margin ratio, preparing contribution margin income statements For its top managers, Worldwide Travel formats its income statement as follows:

Worldwideโ€™s relevant range is between sales of \(253,000 and \)368,000. Requirements

1. Calculate the contribution margin ratio.

2. Prepare two contribution margin income statements: one at the \(253,000 sales level and one at the \)368,000 sales level. (Hint: The proportion of each sales dollar that goes toward variable costs is constant within the relevant range.)

Crandall Company sells flags with team logos. Crandall has fixed costs of \(583,200 per year plus variable costs of \)4.80 per flag. Each flag sells for \(12.00.

Requirements

1. Use the equation approach to compute the number of flags Crandall must sell each year to break even.

2. Use the contribution margin ratio approach to compute the dollar sales Crandall needs to earn \)33,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.)

3. Prepare Crandallโ€™s contribution margin income statement for the year ended December 31, 2018, for sales of 70,000 flags. (Round your final answers up to the next whole number.)

4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Crandall undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)

What are the three ways contribution margin can be ex

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