Question

Sampson Lighting is faced with a decline in demand due to the downsizing of its major customer. Lindsey Rhodes, the company's controller, is considering a number of changes which may affect the company's profitability. Explain how Sampson Lighting's break-even point would change if:

The selling price per unit decrease.

Fixed costs increased throughout the entire range of activity.

Sales people were now compensated on 75% commission and 25% salary and opposed to 75% salary and 25% commission as they were prior.

Answer 1

Solution:

1. If selling price per unit decrease, then contribution margin per unit will also decrease resulting in increase in breakeven point.

2. If fixed costs increased then it will also result in increase in breakeven point as breakeven point is calculated by dividending fixed cost by contribution margin per unit.

3. Increase in sales commission resulting in increase in variable cost per unit and decrease in contribution margin per unit. Further decrease in sales salary will result in decrease in fixed cost. This may result in increase or decrease in breakeven point depending on new contribution margin per unit bases on increase in sales commission as percentage of sales.