Question

1. How would breakeven be affected given the following scenarios   

1. Variable cost per unit decrease
2. If fixed costs increase and variable cost decrease can you determine how breakeven is affected?

2. Which budgets are prepared using the numbers calculated from the production budget?

Answer 1

Solution 1a:

If variable cost per unit decrease, it will result in increase in contribution margin per unit thus decrease the break even point

Solution 1b:

Fixed cost increase result in increase in break even point, variable cost decrease result in decrease in breakeven point.

If fixed costs increase and variable cost decrease, then affect on breakeven could be determined only when rate of increase in fixed cost and decrease in variable cost is known.

Solution 2:

Direct materials purchases budget, Direct labor budget, overhead budgets etc are prepared using the numbers calculated from the production budget