Question

Milne Technology sells 15,000 units each quarter. Its current selling price is $25 per unit and the contribution margin ratio is 0.6. Next quarter the price will increase to $28 per unit, and Milne will keep the same contribution margin ratio. How will the variable cost per unit next quarter change as a result?

Answer 1

Contribution=Selling Price*Contribution Ratio

=25*.06

=$15

Variable Expense=Sales-Contribution

=25-15

$10

When Selling price=$28

Contribution=$28*.06

=$16.8

Variable Expense=28-16.8

=$11.2

Increase in variable=11.2-10

=$1.2