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Holding all other factors constant, the break-even point will be decreased by increasing the fixed costs. decreasing the contribution margin. increasing the selling price. increasing the variable cost per unit. А. В. С. D.

Holding all other factors constant, the break-even point will be decreased by increasing the fixed costs. decreasing the contribution margin. increasing the selling price. increasing the variable cost per unit. А. В. С. D.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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**Understanding the Factors Influencing the Break-Even Point** In the context of business and finance, the break-even point is a critical concept representing the level of sales at which total revenues equal total expenses, resulting in neither profit nor loss for the business. Holding all other factors constant, the break-even point can be influenced by several variables. Let's explore the following question to better understand these influences: --- **Question:** *Holding all other factors constant, the break-even point will be decreased by* A. increasing the fixed costs. B. decreasing the contribution margin. C. increasing the selling price. D. increasing the variable cost per unit. --- **Explanation of Options:** - **A. Increasing the fixed costs:** - Fixed costs are the expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and insurance. Increasing the fixed costs would raise the total expenses, thereby increasing the break-even point rather than decreasing it. - **B. Decreasing the contribution margin:** - The contribution margin is calculated as the selling price per unit minus the variable cost per unit. A lower contribution margin means each unit sold contributes less to covering fixed costs, which would actually increase the break-even point. - **C. Increasing the selling price:** - Increasing the selling price per unit increases the contribution margin, as more revenue is generated per unit sold. This would help cover fixed costs more quickly, thereby reducing the break-even point. - **D. Increasing the variable cost per unit:** - Variable costs change with the level of production, such as raw materials and direct labor. If variable costs per unit increase, the contribution margin decreases, leading to a higher break-even point. Based on the explanations above, increasing the selling price (Option C) would decrease the break-even point, as it enhances the contribution margin and helps cover fixed costs with fewer units sold. --- Understanding these relationships is essential for effective financial planning and decision-making in business operations. Use this knowledge to make strategic choices that optimize your company's profitability.
Transcribed Image Text:**Understanding the Factors Influencing the Break-Even Point** In the context of business and finance, the break-even point is a critical concept representing the level of sales at which total revenues equal total expenses, resulting in neither profit nor loss for the business. Holding all other factors constant, the break-even point can be influenced by several variables. Let's explore the following question to better understand these influences: --- **Question:** *Holding all other factors constant, the break-even point will be decreased by* A. increasing the fixed costs. B. decreasing the contribution margin. C. increasing the selling price. D. increasing the variable cost per unit. --- **Explanation of Options:** - **A. Increasing the fixed costs:** - Fixed costs are the expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and insurance. Increasing the fixed costs would raise the total expenses, thereby increasing the break-even point rather than decreasing it. - **B. Decreasing the contribution margin:** - The contribution margin is calculated as the selling price per unit minus the variable cost per unit. A lower contribution margin means each unit sold contributes less to covering fixed costs, which would actually increase the break-even point. - **C. Increasing the selling price:** - Increasing the selling price per unit increases the contribution margin, as more revenue is generated per unit sold. This would help cover fixed costs more quickly, thereby reducing the break-even point. - **D. Increasing the variable cost per unit:** - Variable costs change with the level of production, such as raw materials and direct labor. If variable costs per unit increase, the contribution margin decreases, leading to a higher break-even point. Based on the explanations above, increasing the selling price (Option C) would decrease the break-even point, as it enhances the contribution margin and helps cover fixed costs with fewer units sold. --- Understanding these relationships is essential for effective financial planning and decision-making in business operations. Use this knowledge to make strategic choices that optimize your company's profitability.
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