Question

Components of Cost-Volume-Profit Analysis

1.Explain the components of cost-volume-profit analysis.
2.What does each of the components mean?
3.What happens to contribution margin per unit when unit selling prices increase? Illustrate your explanation with an example from a fictitious company of how an increase in unit selling prices might affect contribution margin.
4.When fixed costs decrease, what does this do for sales? Illustrate your explanation with an example from a fictitious company.
5.Define contribution ratios.
6.What happens to contribution ratios as one of the components changes

Answer 1

Question 3: when unit selling price increases and assuming that the other variable remain constant, then the contribution margin increases.See the example,

selling price $10

COGS:
V Manufacturing costs $4
V marketing costs 1
COGS 5

Contribution margin 5

Now assume that you increase the price from $10 to $20. the Cost of Goods sold remains the same (5) as a result the Contibution Margin will increase from %5 to $15.