Question

All else equal, an increase in fixed costs

I) increases the break-even point based on NPV;
II) increases the accounting break-even point;
III) decreases the break-even point based on NPV;
IV) decreases the accounting break-even point

a. III and IV only
b. II and III only
c. I and II only
d. I and IV only

Answer 1

An increase in fixed costs leads to a higher accounting break-even point and NPV break-even point, because more revenue is required to cover the increased fixed expenses. The correct option is c.

Step-by-step explanation:

The subject of the question is how an increase in fixed costs affects break-even points based on both accounting and Net Present Value (NPV) perspectives. When fixed costs increase, all else being equal, the amount of revenue needed to cover those costs also rises.

This leads to a higher accounting break-even point, which is the level of sales that covers all costs, including the increased fixed costs. In terms of the NPV break-even point, which considers the time value of money, an increase in fixed costs will require more revenue over time to achieve a break-even NPV. This too results in an increased NPV break-even point. Thus, the correct answer to the question is (c) I and II only.