Question

How does the break-even point move when changes occur in;

a. Variable cost
b. Fixed cost

Answer 1

Variable costs and expenses increase as volume increases and they will decrease when volume decreases.
Fixed costs and fixed expenses are those which do not change as volume changes.

If variable costs increase, without an equivalent increase in revenues, the break-even point will increase to make up for the loss. That means you will need to sell more units to cover fixed costs. A change in product mix can also increase the break-even point, especially if the average contribution margin falls. Similarly if the variable costs decrease, contribution will increase, which will result in a decrease in break even point.

The break-even point will increase when the amount of fixed costs and expenses increases. In other words, if a greater proportion of lower contribution margin products are sold, the break-even point will increase. If the fixed expenses decrease, it will result in reduction in break even point.