Baldwin's product manager is considering lowering the price of the Baker product by $2.50 and wants...
Baldwin's product manager is considering lowering the price of the Baker product by $2.50 and wants to know what the impact will be on the product’s contribution margin. Assuming no inventory carry costs, what will Baker's contribution margin be if the price is lowered?
Homework Answers
Contribution margin (CM), or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. "Contribution" represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.
As the problem statement suggests, there is no change in cost data with reduction in price level.
Therefore with no change in cost, reduction in price will reduce contribution margin by same extent.
Therefore made under the key assumption that there is no change in variable cost per unit , Baker’s contribution margin will reduce by $2,50 with reduction of $2.50 in price level.
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