A firm has $50,000 in fixed costs, a selling price of $25 per unit, and variable costs of $5 a unit. If the fixed costs are reduced to $40,000:
A) Breakeven volume will decrease.
B) Breakeven volume will increase.
C) Profits will be reduced.
D) Selling price will be increased.

Question

Quizplus · Accepted Answer

Reducing fixed costs from $50,000 to $40,000 decreases the total amount of money the firm needs to cover its costs, thus lowering the breakeven volume. The breakeven volume is the number of units the firm needs to sell to cover its costs, and when fixed costs are lower, fewer units need to be sold to reach this point.

A Firm Has $50,000 in Fixed Costs, a Selling Price