Question

Which of the following is true about the breakeven point in units?

Multiple Choice

• A decrease in fixed costs will increase the breakeven point; an increase in variable costs per unit will increase the breakeven point.

• A decrease in fixed costs will increase the breakeven point; an increase in variable costs per unit will decrease the breakeven point.

• A decrease in fixed costs will decrease the breakeven point; an increase in variable costs per unit will decrease the breakeven point.

• A decrease in fixed costs will decrease the breakeven point; an increase in variable costs per unit will increase the breakeven point.

Answer 1

1.

The correct statement is (d) i.e. A decrease in fixed costs will decrease the breakeven point; an increase in variable costs per unit will increase the breakeven point.

Breakeven units = Total Fixed Costs / Contribution margin per unit

Reducing fixed costs will reduce the breakeven point as shown below.

Example - Case 1

Fixed costs = 100,000

Contribution p.u. = 50

Breakeven units - 2,000

Case 2

Fixed costs = 90,000

Contribution p.u. = 50

Breakeven units - 1,800

Similarly if Variable costs are increased, Contribution will decrease and hence breakeven units will increase as shown below.

Example - Case 1

Fixed costs = 100,000

Contribution p.u. = 50

Breakeven units - 2,000

Case 2

Fixed costs = 100,000

Contribution p.u. = 40

Breakeven units - 2500