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E operates a marginal coating system.For the forthcoming year,variable costs are budgeted to be 60% of sales value and fixed costs are budgeted to be 10% of sales value.
If E were to increase the selling price by 10% and all other costs and production and sales volumes were to remain the same what would be the effect on E’s contribution.How do we come to a conclusion that it is an increase of 25%.
Many thanks
Suppose the sales value is $100.
The variable cost will be $60 and therefore the contribution will be $40.If the selling price goes up by 10% then it is $110.
The variable cost is still $60 and therefore the contribution becomes $50.This is an increase of 10/40 which is 25%.
You will get the same answer whatever figure you use for the sales value.
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