Answer:
a. The contribution margin per unit will decrease
b. The contribution margin ratio will stay unchanged.
Explanation:
To illustrate this, let's consider:
Unit selling price = $100
Unit variable cost = $60
Thus,
Contribution margin per unit = $40
Contribution margin ratio = $40 / $100 = 0.40, or 40%
<pIf both the selling price and variable costs fall by 5% while fixed costs remain constant, we obtain:
Unit selling price = $100 * 95% = $95
Unit variable cost = $60 * 95% = $57
Contribution margin per unit = $95 - $57 = $38
Contribution margin ratio = $38 / $95 = 0.40, or 40%
Therefore, it can be seen that the contribution per unit declines from $40 to $38, whereas the contribution margin ratio remains constant at 40%.
