Question

# Assume that a profitable firm has been notified that all costs for the coming year will...

Assume that a profitable firm has been notified that all costs for the coming year will decrease by 2%.  The firm will respond by decreasing all selling prices by 2%.  The impact of these changes will be to

a. lower the breakeven point in sales dollars

b. increase the breakeven point in sales dollars

c. have no impact on the breakeven point in sales dollars

The company currently has monthly fixed costs of \$20,000, variable cost per unit of \$10 and a selling price of \$15 per unit.  The firm is considering decreasing monthly fixed cost by \$3,000 and increasing variable cost per unit by \$3.  The impact of these changes will be to

a. increase the unit breakeven point

b. decrease the unit breakeven point

c. have no impact on the unit breakeven point

First question

Answer is a). The impact of decreasing all costs and SP by 2% lower the breakeven point in sales dollars as calculated below by assuming before reduction FC as 100, VC as 10 and SP as 12

Before Reduction \$    After reduction \$

FC    100    98

VC 10       9.80

SP 12 11.76

Contribution margin 2    1.96

Contribution Margin ratio 0.16666     0.16666

Break even sales \$ = 100/.0.16666 98/0.16666

(FC / CMR)

\$ sales Rounded neares \$) 600 588

Rounded to nearest \$)

Second question : Answer is a) increase the unit breakeven point as calculated below

Before \$     After \$

FC     20000 17000

VC 10    13

SP 15 15

Contribution margin 5    2

Break even units\$ = 20000/5 17000/2

(FC / CM)

\$ Break Even units 4000 8500

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