Question

1. If a company cannot sell enough to break even, what are the options?

		All of these are valid options
		Pull the plug
		Attempt to raise sales price
		Try to reduce variable costs
		Search for someone else to make it for you
		Try to reduce fixed costs
		None of the above

Mcq choose 1

Answer 1

Theory:

If the break-even point is not reached, it means the company could not cover it's fixed cost with profits from selling the number of units they sold.

Option Evaluation:

Plug the Plug - Unadvisable as some profits can still be made by an alternative method

Attempt to raise sales prices - May lead to a reduction in volume sold and hence company won't break-even

Try to reduce variable cost- Variable costs may include cost of raw material, direct labor cost, etc. Difficult to achieve in the short term. Hence Unadvisable.

Search someone else to make it for you- Typically costs higher variable cost per unit but completely eradicated fixed costs and ensures a profit on every unit of the item sold. The company shall only start making products after it crosses the indifference point which is the volume of sales for which making cost and buying cost is the same. Volume higher than indifference point will justify making costs. Hence this option is correct.

For example,

In this case, Buying cost is lower than making cost till sales volume is reached 75 which is the indifference point.

For volumes higher than the indifference point, making costs are lower than buying costs.

Till this volume is reached company should buy from outside.

Try to reduce fixed cost- Fixed cost includes rent, insurance, salaries, utilities etc which could be extremely difficult to reduce. Hence Unadvisable.

None of the above - Unadvisable as a better alternative is available.