Question

24. If the total amount of fixed costs increases, what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point decreases.

B) The break-even point increases.

C) The break-even point remains the same.

D) The break-even point is zero.

25. If the variable cost per unit increases, what is the effect on the break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

26. Assume Ravi Company has the following information available:

Selling price per unit                                            $50

Variable cost per unit                                           $30

Fixed costs per year                                    $200,000

Expected sales per year (units)                   20,000

If fixed costs increase by $80,000, what is the break-even point in units?

A) 6,667

B) 10,000

C) 12,000

D) 14,000

27. The use of high technology equipment to manufacture products instead of highly skilled labor usually results in ________.

A) higher operating leverage

B) higher discretionary fixed costs

C) higher discretionary variable costs

D) lower risk

28. Managers can eliminate ________ costs entirely for a given year in dire times such as a major recession. However, managers cannot eliminate ________ costs.

A) discretionary variable costs; committed variable costs

B) discretionary variable costs; committed fixed costs

C) discretionary fixed costs; committed fixed costs

D) committed fixed costs; committed variable costs

Answer 1

Answer to Question No. 24

Option B is Correct.

Break Even Point is calculated by dividing Fixed Cost with the Contribution Margin per Unit/ Contribution Margin Ratio.

Break Even Point = Fixed Cost / Contribution Margin per unit

An increase in Fixed Cost will increase the Numerator but leaving the Denominator same as before, this change will increase Break Even Point.

Answer to Question No. 25

Option A is Correct.

Break Even Point is calculated by dividing Fixed Cost with the Contribution Margin per Unit/ Contribution Margin Ratio, where Contribution margin is excess of Sale price over Variable Cost.

Break Even Point = Fixed Cost / Contribution Margin per unit
Contribution Margin per unit = Sale Price – Variable Cost

An increase in Variable Cost will decrease the Contribution Margin. A decrease in Denomiator, with other things remaining the same, will increase Break Even Point.

Answer to Question No. 26

Option D is Correct.

Break Even Point = Fixed Cost / Contribution Margin per unit
Contribution Margin per unit = Sale Price – Variable Cost
Contribution Margin per unit = $50 - $30 = $20

Expected Fixed Cost = $200,000 + $80,000 = $280,000

Break Even Point = 280,000 / 20
Break Even Point = 14,000 Units