Question

Explain how break-even units of sale would change when per unit price increases by 5% but variable expense per unit decreases by more than 5%.

Answer 1

Breakeven Units = Fixed Cost/ Contribution Per Unit

As per Question if the price per unit increases by 5% and Variable cost decreases by 5% then the Contribution per Unit will increase and so the Breakeven Units will Decrease.

For Example:

Suppose the following Data:

Fixed Cost = 10000

Price Per Unit = 5

Variable Expenses = 3

	Scnerio 1	5% Change	Scnerio 2
Sales	5	0.25	5.25
Variable Expenses	3	0.15	2.85
Contribution per Unit	2		2.4
FC	50000		50000
BE Units	50000/2		50000/2.4
BE Units	25000 units		20833.33 units

So you can see in above example that when we have increased the Price by 5% and Reduced the Variable Expense by 5% then our Contribution will increase which will lead to the reduction of Break Even Units