Question

All other things held constant, how will an increase in selling price affect the break-even point measured in units? Explain your answer (you may use an example, and you may even use a diagram if you want.).

Answer 1

All other things held constant an increase in selling price decreases the Break even point measured in units For example ($) Selling price per unit Variable cost per unit Contribution per unit 100 40 60 Fixed cost 300,000 Fixed cost Contribution per unit Break even point= (in units) 300,000 60 50,000 units Now Suppose selling price increases to $120 other things held constant 120 - 40 Revised contribution $80 Fixed cost Contribution per unit 300,000 per unit = Revised Break even point (in units)= 80 37500 units Hence it is proved that increase in selling price decreases Brea k even point Diagram for explanation Increase in Sales due to increase in selling price. NTS = New Total Sales line NIS Total Sales Total Cost Angle of Incidence FC O BEP Units .line indicates changes in break even point and changes in sales. From the above chart, we observe that profit is increased by increasing the selling price and alsa if there is change in seling price. BEP also changes. If seling price is increased then BEP decreases If selling price is decreased then BEP increases. Thus, we say that there is an inverse relationshir- between selling price and BEP. anuana o