The break-even in units sold will decrease if there is an increase in which of the following?
A) Total fixed expenses.
B) Selling price.
C) Unit sales volume.
D) Unit variable expenses.
The correct answer and explanation is :
Correct Answer: B) Selling Price
Explanation:
The break-even point in units is the number of units a business must sell to cover all its fixed and variable costs. It is calculated using the formula:
[
\text{Break-even point (in units)} = \frac{\text{Total Fixed Costs}}{\text{Selling Price per Unit} – \text{Variable Cost per Unit}}
]
This equation shows that break-even is affected by fixed costs, selling price, and variable costs. Let’s analyze each option:
- Total Fixed Expenses (Option A) – If total fixed expenses increase, the numerator in the break-even formula rises, meaning more units need to be sold to cover costs. This increases the break-even point rather than decreasing it.
- Selling Price (Option B) – Correct Answer
If the selling price per unit increases, the denominator ((\text{Selling Price} – \text{Variable Cost})) becomes larger. Since the numerator (fixed costs) remains the same, the overall break-even point decreases. This means fewer units need to be sold to cover costs. - Unit Sales Volume (Option C) – Unit sales volume refers to the number of units sold but does not directly affect the break-even point. Instead, break-even focuses on the minimum required units to cover expenses.
- Unit Variable Expenses (Option D) – If unit variable costs increase, the denominator ((\text{Selling Price} – \text{Variable Cost})) becomes smaller, making the break-even point larger, meaning more units must be sold to cover costs.
Conclusion:
A higher selling price increases contribution margin per unit, reducing the number of units needed to cover fixed costs. Therefore, an increase in the selling price decreases the break-even point in units.
