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 total 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.

Answer 1

a. An increase in fixed costs:

(1) Break even point will go up , as the amount to be recovered from the sale increases due the increase in fixed costs.

(2) There will be no effect on the unit contribution margin , as the contribution margin is concerned with variable costs. The fixed costs come into picture only after the calculation of contribution margin.

(3) The expected total profit will go down , as a higher amount of fixed costs are to be recovered from the available contribution margin.

(b) A decrease in wage rate applicable to directly , strictly variable labor.

(1) Break-even point will come down as the contribution margin will increase due to decrease in direct labor cost.

(2) Unit contribution margin will increase as the varibale costs are reduced resulting in higher total contribution margin.

(3) Expected total profit will increase as the higher contribution will increase the margin between the contribution margin and fixed costs which is the total profit.

(c) An increase in selling price of the product.

(1) The break-even point will decrease as the contribution margin will go up , which will result in higher recovery of fixed costs.

(2) The unit contribution margin will increase, as the contribution margin is the difference between the sales and variable costs.

(3) Expected total profit will go up as the selling price results in increasing contribution margin. Since profit is the difference between contribution margin and fixed costs, total profit will increase.

(d) An increase in production and sales volume.

(1) An increase in production and sales volume will not have any effect on the break-even point. Break-even point is dependent on the sales price and cost structure and not on volumes.

(2) An increase in production and sales volume has no efect on unit contribution margin, as this will increase the total sales value and total cost amount and will not have any effect on unit sales price and costs.

(3) The expected profit will go up as increased sales volume will generate higher contribution margin which will result in higher profits.

(e) An increase in building insurance rates.

(1) This will not have any effect on the break-even point as insurance expense is part of fixed costs.

(2) This will not have any effect on unit contribution margin as insurance expense is part of fixed costs.

(3) The totla profit will come down as the fixed costs will increase.