Question

What effect could the following changes, occurring independently, have on (1) the break-even point, (2) the unit contribution margin, and (3) the expected net profit?

a) an increase in fixed costs

b) a decrease in wage rates applicable to direct, strictly variable labor

c) an increase in the selling price of the product

d) an increase in production and sales volume

e) an increase in building insurance rates

Pick two of the five changes and comment on them, providing numbers to justify or prove your assessment.

Answer 1

		Impact on:
		Break-even point	Units CM	Expected Net Profit
	a. An Increase in Fixed Costs	Increase	No effect	Decrease
	b. Decrease in wage labor, strictly variable	Decrease	Increase	Increase
	c. An increase in selling price of product	Decrease	Increase	Increase
	d. An Increase in production and sales volume	No effect	No effect	Increase
	e. An increase in Building insurance rate	Increase	No effect	Decrease
	Consider the following Income statement
	Income Statement
		Total	Per unit
	Sales	$         4,16,000.00	$                        20.00
	Variable expenses	$         2,49,600.00	$                        12.00
	Contribution Margin	$         1,66,400.00	$                          8.00
	Fixed expenses	$         1,16,800.00
	Net Operating Income	$            49,600.00
	Break-even point in units($116,800/$8)	14600	units
Point a	Now suppose the Fixed Cost increases by $16,000 then the revised Income statement shall be as follows
	Income Statement
		Total	Per unit
	Sales	$         4,16,000.00	$                        20.00
	Variable expenses	$         2,49,600.00	$                        12.00
	Contribution Margin	$         1,66,400.00	$                          8.00
	Fixed expenses	$         1,32,800.00
	Net Operating Income	$            33,600.00
	Break-even point in units($116,800/$8)	16600	units
	As you can see that the Break-even point has increased and Net Income has decreased
	Now consider the original data again
Point b	Now suppose the variable expenses has decreased by $2 per unit then the revised Income statement shall be as follows
	Income Statement
		Total	Per unit
	Sales	$         4,16,000.00	$                        20.00
	Variable expenses	$         2,08,000.00	$                        10.00
	Contribution Margin	$         2,08,000.00	$                        10.00
	Fixed expenses	$         1,32,800.00
	Net Operating Income	$            75,200.00
	Break-even point in units($116,800/$8)	13280	units
	As you can see that the Break-even point has increased and Net Income has increased and units CM has increased