Question

Which of the following conditions would cause the break-even point to increase?

a.Total fixed costs increase

b.Unit variable cost decreases

c.Total fixed costs decrease

d.Unit selling price increases

Answer 1

Solution:

Break even point increases when the Total fixed cost increases

The formula for calculating the break even point is = Fixed costs / ( Unit selling price - Unit Variable cost )

Example : Let the fixed cost be $ 10,000 ; Unit selling price = $ 20 ; Unit variable cost = $ 10

Thus the break even point = $ 10,000 / ( $ 20 - $ 10 )

= $ 10,000 / $ 10 = 1000 units

Now if the Fixed cost increases to $ 15,000, the Break even point will be

= $ 15,000 / ( $ 20 - $ 10 ) = $ 15,000 / $ 10 = 1500 units

Thus it can be clearly seen that the Break even point increases from 1000 units to 1500 units when the total fixed cost increases.

The solution is option a. Total fixed costs increase.

The other options are incorrect. The same has been explained with calculations as follows :

b.Unit variable cost decreases

When the unit variable cost decreases the break even point decreases.

Example :

Continuing from the example above let the unit variable cost decreases to $ 5,

Thus the Break even point shall be

= $ 10,000 / ( $ 20 - $ 5 ) = $ 10,000 / $ 15 = 666.67 units

Thus we see that the break even point decreases from 1000 units to 666.67 units as the unit variable cost decreases.

Thus this option is incorrect.

c.Total fixed costs decrease

Lets assume that the fixed cost decreases to $ 5,000

Thus the Break even point shall be

= $ 5,000 / ( $ 20 - $ 10 ) = $ 5,000 / $ 10 =500 units

Thus we see that the break even point decreases from 1000 units to 500 units as the fixed cost decreases.

Thus this option is incorrect.

d.Unit selling price increases

let the unit selling price increase to $ 25,

Thus the Break even point shall be

= $ 10,000 / ( $ 25 - $ 10 ) = $ 10,000 / $ 15 = 666.67 units

Thus we see that the break even point decreases from 1000 units to 666.67 units as the unit selling price increases.

Thus this option is incorrect.