Question

An increase in either the firm’s fixed costs (FC) or its variable costs (VC) will cause the

                                                firm’s operating breakeven point (OBP) in “units” to decrease. True or false

Answer 1

Ans.	FALSE
	Explanations: Increase in fixed costs and variable cost will increase the operating
	break even point in units.
	We can understand this by the following example:
	Selling price per unit	$10.00
	Variable cost per unit	$6.00
	Contribution margin per unit	$4.00
	Fixed cost    =    $10,000
	Operating break even point in units   = Fixed cost / Contribution margin per unit
		$10,000 / $4
		2500 units
Case 1:	If, Fixed cost increase by $2,000:
	New fixed cost ($10,000 + $2,000)   =   $12,000
	Operating break even point in units   = Fixed cost / Contribution margin per unit
		$12,000 / $4
		3,000 units
Case 2:	If, Variable cost increase by $2 per unit:
	New contribution margin ($10 - $6 + $2) =   $2
	Operating break even point in units   = Fixed cost / Contribution margin per unit
		$10,000 / $2
		5,000 units
	*In both case the operating break even point in units have increased.