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 net 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

Pick two of the five changes and comment on them.

Answer 1

Solution :

a. An increase in fixed costs, will result in to increase in breakeven units, and decrease in expected net profit. Increase in fixed will not have any impact on unit contribution margin.

b. A decrease in wage rate will result in reduction in variable cost, thus resulting in to increase in unit contribution margin. If unit contribution margin will increase it will result in reduction in breakeven unit and increase in expected net profit.

c. Increase in selling price per unit will result in increase unit contribution margin, reduce break even units and increase in expected net profit.

d. Increase in production and sale volume will not have any effect on breakeven point and unit contribution margin. however it will result in increase in expected net profit.

e) Increase in building insurance rates will result in increase in fixed cost, therefore resulting in increase in breakeven units and decrease in expected net profit. However no impact on unit contribution margin.