Question

If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will:

a)decrease
b)change but direction cannot be determined
c)increase
d)not change

Answer 1

The break-even point in units will not change if the company increases its selling price by the same amount as the increase in variable labor costs because the extra revenue will offset the higher costs, keeping the contribution margin unchanged.

Step-by-step explanation:

When a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will not change. This is because the additional revenue earned from the increase in selling price exactly offsets the increase in variable costs, leaving the contribution margin per unit unchanged. Since the break-even point is calculated by dividing the total fixed costs by the contribution margin per unit, if the contribution margin remains the same, the break-even point in terms of units sold will remain the same.