Asked by Christine Angora on May 14, 2024
Verified
The contribution margin ratio increases when
A) fixed costs increase.
B) fixed costs decrease.
C) variable costs as a percentage of sales decrease.
D) variable costs as a percentage of sales increase.
Contribution Margin Ratio
A financial metric that shows what percentage of sales revenue is available to cover fixed costs and generate profit after variable costs have been paid.
Variable Costs
Costs that change in proportion to the level of activity or volume of goods produced by a business.
Sales Decrease
A drop in the volume or amount of products or services sold by a company within a specific period.
- Study the effects of transformations in pricing structure and market volume on a business entity's net earnings.
Verified Answer
BR
Bianca RojasMay 20, 2024
Final Answer :
C
Explanation :
The contribution margin ratio is calculated by dividing the contribution margin (sales revenue minus variable costs) by sales revenue. As variable costs decrease as a percentage of sales (either due to economies of scale, discounts on bulk purchases, or other factors), the numerator of this ratio increases and the denominator remains constant, resulting in a higher contribution margin ratio. Fixed costs are not a factor in this calculation.
Learning Objectives
- Study the effects of transformations in pricing structure and market volume on a business entity's net earnings.