Question

Explain how changes in variable costs generally affect the breakeven point.

Explain how changes in sales price generally affect the breakeven point.

Answer 1

1st part;

Break even point in units = fixed costs / (sale price per unit - variable cost per unit)

Since variable costs are a deduction from the denominator part, it can be said that other things being constant, an increase in variable cost will reduce the denominator value, due to which the break even point will increase.

Other things being constant, a decrease in variable cost, will increase the denominator value and thereby reduce the break even point.

Thus it can be said that other things being constant, the variable costs and breakeven point are directly related.

2nd part;

Break even point in units = fixed costs /(sale price per unit - variable cost per unit)

Other things being constant, a sale price increase will increase the denominator, which will reduce the break even point.

Other things being constant, a sale price decrease will decrese the denominator, which will increase the break even point.

Thus it can be said that other things being constant, the sales price and break even point are inversely related to each other.