Assume a product costs $5 each. The variable cost per unit is currently $4, and fixed costs are $25,000. If the company can alter its production method such that variable costs fall to $3.50 and fixed costs rise to $30,000, what will happen to the breakeven point?
A) It will fall.
B) It will rise.
C) It will remain the same.
D) It will rise and fall later.

Question

Quizplus · Accepted Answer

The breakeven point is the level of sales at which the company neither makes a profit nor incurs a loss. It is calculated as follows:

Breakeven point = Fixed costs / (Price - Variable costs)

Using the original numbers:
Breakeven point = $25,000 / ($5 - $4) = 25,000 units

Using the new numbers:
Breakeven point = $30,000 / ($5 - $3.50) = 30,000 units

Comparing the two, we can see that the breakeven point has increased from 25,000 units to 30,000 units. This means that the company would have to sell more units in order to cover its costs and break even. Therefore, the answer is A, the breakeven point will fall.

Assume a Product Costs $5 Each