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Fixed costs are $8,000 and variable cost is $10 per unit. The selling price rises from $18 to $20. What happens to the breakeven point?
AIt falls from 1,000 units to 800 units
BIt rises from 1,000 units to 1,200 units
CIt stays at 1,000 units in either case
DIt falls from 1,000 units to 900 units
Answer & Solution
Correct answer: A. It falls from 1,000 units to 800 units
1. At $18 the unit contribution margin is $8 and breakeven is $8,000 divided by $8, or 1,000 units.
2. At $20 the unit contribution margin becomes $20 minus $10, which is $10.
3. Breakeven is now $8,000 divided by $10, which is 800 units.
4. A higher price widens the margin, so fewer units are needed to cover the same fixed costs.
5. A cut in variable cost to $8, or a cut in fixed costs to $6,400, would move breakeven to 800 units just as effectively.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.3.3 Relationships in the Breakeven Equation_
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