Answer (A) is correct . Unit contribution margin (UCM) equals unit selling price minus unit variable costs. It can be decreased by either lowering the price or raising the variable costs. As long as UCM is positive, a given percentage change in selling price must have a greater effect than an equal but opposite percentage change in variable cost. The example below demonstrates this point. ? Original: UCM = SP – UVC = $100 – $50 = $50 Lower Selling Price: UCM = (SP × .85) – UVC = $85 – $50 = $35 Higher Variable Cost: UCM = SP – (UVC × 1.15) = $100 – $57.50 = $42.50 Since $35 < $42.50, the lower selling price has the greater effect.
Answer (B) is incorrect because A 15% increase in variable expenses will not decrease the CM as much as a 15% decrease in sales price.
Answer (C) is incorrect because A decrease in variable expenses would increase UCM.
Answer (D) is incorrect because Fixed expenses have no effect on the contribution margin.
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