In: Accounting
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
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 |