Question

A company has increased its fixed costs (from financial exercise N to financial exercise N+1) from 80.000 EUR to 100.000 EUR and increased the percentage of variable costs in sales (v) from 20% to 30%. What will be the change (increase/decrease) (Δ) of company’s sales at breakeven point as a consequence of these measures? Recommend one way to decrease the sales at breakeven point and justify your answer.

Answer 1

Earlier, 20% of the total sales was variable cost. Hence, 80% was available to compensate the fixed costs. Hence, the breakeven point was at the level of = 80/0.8 = 100.

Now that the variable cost has increased, the contribution now will be 70%. And the new fixed cost is 100. Hence, the new breakeven point in sales will be = 100/0.7 = 142.85.

Hence, the change in breakeven sales will be = (142.85 - 100)/100 = 42.85%.(Increase of 42.85%)

To decrease the sales at breakeven point they must decrease the fixed costs because higher fixed costs means that more and more of potential profit goes in compensating for the fixed costs. Suppose if the fixed cost was 0 (hypothetically), then in the first sale itself, we will start having a profit and therefore the breakeven point will be 0.