Question

Each of a company's two product lines has a different contribution margin ratio. If the company's...

Each of a company's two product lines has a different contribution margin ratio. If the company's total sales remain the same but the sales mix shifts toward selling more of the product with the LOWER contribution ratio, which of the following is true?

  • operating income will decrease.

  • the average contribution margin ratio will decrease.

  • the breakeven point will increase.

  • all of the answers are true.

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Answer #1
Correct Answer: Option D i.e. all of the answers are true.
Reason:
1) operating income will decrease Due to selling more with lower contribution margin, our overall contribution margin will get decreased thereby operating income will decrease.
2) the average contribution margin ratio will decrease. product with lower contribution when get higher weight (proportion) then overall contribution margin will decrease.
3) the breakeven point will increase. Break-even = Fixed cost / Contribution margin ratio ; when contribution margin ratio is decreased thereby numerator will decrease and breakeven will get increase.
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