Question

8. A company increased the selling price of its product from $1.00 to $1.10 a unit when total fixed costs increased from $400,000 to $480,000 and variable cost per unit remained unchanged. How will these changes affect the breakeven point? A. These changes will increase the breakeven point B. These changes will decrease the breakeven point C. These changes will not affect the breakeven point D. The effect cannot be determined

Answer 1

C. These changes will not affect the breakeven point

Step-by-step explanation:

The BEP which is the break even point is the point where the company's sales or revenue generated is equal to the cost incurred. As such, the BEP is the number of units that must be sold for the company to make neither a profit nor a loss.

Both sales and variable cost are dependent on the number of units sold.

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

As such, the net operating income/loss is the difference between the sales and the total costs

Let the number of units to break even be u, the variable cost per units be v

then before the increase,

u(1 - v) = 400,000

u = 400,000/(1 - v)

After the increase

u(1.1 - v) = 480,000

u = 480,000/(1.1 - v)

Assuming a random figure of $0.50 for the variable cost per unit, the units required to breakeven before the changes made

= 400000/(1-0.5)

= 800,000 units

After the changes made the units required to breakeven

= 480,000/(1.1 - 0.5)

= 480,000/0.6

= 800,000 units