Question

In: Accounting

Which of the following conditions would cause the break-even point to increase? a.unit selling price increases...

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

a.unit selling price increases

b.unit variable cost decreases

c.unit variable cost increases

d.total fixed costs decrease

Solutions

Expert Solution

The correct answer is :

c.unit variable cost increases

Note:

Break Even Point = Fixed Cost / Contribution Margin Per Unit

Also,  Contribution Margin Per Unit = Selling Price Per Unit - Variable Cost Per Unit

a. If  selling price increases:

The break even point would decrease as the Unit Contribution Margin would increase.

b. unit variable cost decreases:

The break even point would decrease as the Unit Contribution Margin would increase

c. unit variable cost increases

The break even point would increase as the Unit Contribution Margin would decrease

d.total fixed costs decrease

The break even point would decrease.

This can be understood with the help of examples :

Existing unit selling price increases unit variable cost decreases unit variable cost increases total fixed costs decreases
Selling Price 10 16 10 10 10
Less : Variable Cost 5 8 4 7 5
Contribution Margin 5 8 6 3 5
Fixed Cost 96,000 96,000 96,000 96,000 85,000
Break Even Point 19,200 12,000 16,000 32,000 17,000

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