Question

Abensan Company sells a single product. If both the selling price and variable cost per unit increase by 5% and fixed costs remain steady, then contribution margin per unit and break- even point in units will, respectively, decrease and increase. increase and remain unchanged. decrease and remain unchanged. O increase and decrease.

Answer 1

Option 4th Increase and decrease

1) Explanation: If selling price and variable cost both increase by the same percentage then the increasing portion of selling price will be higher than the variable cost because the selling price per unit is the greater amount than the variable cost per unit generally.

We can understand this fact by the following example:

Selling price per unit = $100 per unit

Variable cost per unit = $60 per unit

Fixed cost = $210

the contribution margin per unit ($100 - $60) = $40 per unit

Now we will increase selling price and variable cost by 5%:

Selling price per unit ($100*1.05) = $105 per unit

Variable cost per unit ($60*1.05) = $63 per unit

So, the contribution margin per unit ($105-$63) = $42 per unit

2) break even point will decrease due to equal percentage increase in selling price per unit and variable cost per unit because the contribution margin per unit is used as denominator in the calculation of break even point in units. So the increase in denominator (contribution margin per unit) will decrease the result.

*Contribution margin per unit on current level = $40 per unit

Break even point = Fixed cost / Contribution margin per unit

= $210 / $40

= 5.25 units

*Contribution margin per unit after increase = $42 per unit

Break even point = Fixed cost / Contribution margin per unit

= $210 / $42

= 5 units

So the (equal percentage) increase in selling price and variable cost will decrease the break even point in units.