Question

Garth Corporation sells a single product. If the selling price per unit and the variable expense per unit both increase by 10% and fixed expenses do not change, then:
A) CM per Unit Increases
CM ratio Increases
Break-even in unites Decreases

B) CM per unit: No change
CM ratio: No change
BE in units: No change

C) CM per unit: No change
CM ratio: Increases
BE in units: No change

D) CM per unit: Increases
CM ratio: No change
BE in units: Decreases

Answer 1

Answer:

D) CM per unit: Increases

CM ratio: No change

BE in units: Decreases

Explanation:

Let us suppose that

In the first case

The selling price per unit is $100

And, the variable cost per unit is $50

The fixed expense is $100,000

So, the contribution margin per unit

= $100 - $50

= $50

The CM ratio is

= $50 ÷ $100

= 50%

And, the break even point in units is

= $100,000 ÷ $50

= 2,000 units

Now if the selling price per unit and the variable expense per unit both increase by 10%

So,

The selling price per unit is $100 × 1.10 = $110

And, the variable cost per unit is $50 × 1.10 = $55

The fixed expense is $100,000

So, the contribution margin per unit

= $110 - $55

= $55

The CM ratio is

= $55 ÷ $110

= 50%

And, the break even point in units is

= $100,000 ÷ $55

= 1,818 units

Hence, the last option is correct