Question

Chester's product manager is considering lowering the price of the Cone 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 Cone's contribution margin be if the price is lowered?

Answer 1

Answer:

The contribution margin will decrease by 2.50

Explanation:

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

IF sales decreases, then the contribution margin decreases.

That's because, there is less money to pay for the variable cost.

The company will also have to sale more units to break even, as now each units contribution is fewer.

Cone's should evaluate how much their sales are expected to increase for the lower price and be cautious