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Fixed costs for the month fall while selling price and variable cost per unit are unchanged. What happens to the contribution margin ratio?
AIt rises, because fixed costs are now smaller
BIt falls, because the margin now covers less
CIt rises, because operating income has grown
DIt is unchanged, because it excludes fixed costs
Answer & Solution
Correct answer: D. It is unchanged, because it excludes fixed costs
1. The contribution margin ratio is built from sales and variable costs only.
2. Fixed costs sit below the contribution margin line, so they never enter the ratio.
3. A fall in fixed costs therefore leaves the ratio exactly where it was.
4. Operating income does rise, which is the distractor that tempts a reader into moving the ratio as well.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.2.1 Contribution Margin_
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