Answer:
a. Contribution margin per unit will fall
b. Contribution margin ratio will remain the same.
Explanation:
To show this let us assume that we have:
Selling price per unit = $100
Variable cost per unit = $60
Therefore,
Contribution margin per unit = $40
Contribution margin ratio = $40 / $100 = 0.40, or 40%
If the selling price and variable costs both decrease by 5% and fixed costs do not change, we have:
Selling price per unit = $100 * 95% = $95
Variable cost per unit = $60 * 95% = $57
Contribution margin per unit = $95 - $57 = $38
Contribution margin ratio = $38 / $95 = 0.40, or 40%
From the above, contribution margin per unit fall from $40 to $38, while contribution margin ratio will remain the same at 40%.
