If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars) decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively?

(A) Contribution margin ratio decrease, Break even point increase
(B) Contribution margin ratio increase, Break even point decrease
(C) Contribution margin ratio decrease, Break even point decrease
(D) Contribution margin ratio increase, Break even point increase

(B) Contribution margin ratio increase, Break even point decrease

Explanation:

Effect on Contribution margin ratio

Contribution = Selling Price - Variable Cost

From the formula it can be seen that Fixed Cost element does not have an effect here

If the variable costs  decrease, the contribution increase.Which consequently increases contribution margin ratio

Contribution Margin Ratio = Contribution/Selling Price

Effect on Break even point

Break Even Point = Fixed/Contribution per unit

Both the Fixed cost element and the Variable cost element has an effect

If the fixed costs  decrease, while the contribution increase, Break even point in decrease.

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