Final answer:
The correct answer is A. the break-even point rises. Because if the price per unit decreases due to competition, and all costs remain the same, more units need to be sold to reach the break-even point where no profit or loss occurs.
Step-by-step explanation:
If the price per unit decreases because of competition but the cost structure remains the same, the correct answer to this student's question is A. the break-even point rises. This is due to the fact that if the selling price is decreased, with all costs staying the same, a company will need to sell more units to cover its fixed costs and reach the break-even point. The break-even point is the level of sales at which total revenues equal total costs and the company makes no profit but also incurs no loss.
By considering the relationship between prices, costs, and output levels, it is evident that with a constant cost structure the reduction in price per unit across the industry, due to competition, will require companies to sell a greater quantity of their product to reach the point where they neither gain nor lose money—the break-even point.
Options B and C are related to leverage, which refers to the use of fixed costs to magnify the effects of changes in sales on the earnings before interest and taxes (EBIT). Financial leverage specifically deals with the use of fixed financial charges (like interest on debt). A change in the price per unit due to competition doesn't necessarily impact the company's debt or equity structure, thus there won't necessarily be a change in the degree of financial leverage, which is more concerned with the financing mix of the company.