Question

Which of the following changes to a company's contribution income statement will always lower the break-even point (either in units or in dollars)?

a) Sales price increases by 10%.

b) Sales price decreases by 5%.

c) Variable costs increase by 10% and fixed costs decrease by 5%.

d) Variable costs decrease by 5% and fixed costs increase by 10%.

Answer 1

Answer is (a) Sales price increases by 10%

Breakeven point (in units) = Fixed cost / contribution per unit.

If sales price increases, it will lead to increase in contribution per unit. As in the above formula, contribution per unit comes in the denominator, an increase in contribution per unit (denominator) will lead to decrease in breakeven point (in units) provided the fixed cost (numerator remains the same).

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