Question

Assuming that all other factors remain unchanged, determine how a firm’s breakeven point is affected by each of the following developments: a. The firm finds it necessary to reduce the price per unit because of competitive conditions in the market. b. The firm’s direct labor costs increase as a result of a new labor contract. c. The Occupational Safety and Health Administration requires the firm to install new ventilating equipment in its plant. (Assume that this action has no effect on worker productivity.)

Answer 1

a. Increases

b. Increase

c. Increase

Step-by-step explanation:

a. If the firm reduces the price at which they sell their product, it would mean that less revenue will come in. As the breakeven point refers to the point where Revenues are equal to expenses, that point will have to increase because more products will have to be sold to make enough revenue to match the expenses.

b. The breakeven point as earlier mentioned is the point where Revenue equals expenses. If the expenses rise then the company would need to sell more products in order to make more revenues to enable it match the expenses. Breakeven point will therefore rise.

c. With new ventilating equipment being installed, it means that the machine will have to be depreciated every period. This is a fixed expense which will increase total expenses. More revenue will be needed to get to the breakeven point which means that the breakeven point will increase.