Question

Breakeven Points

The purchasing manager for Forster’s Fashion Bags has been able to purchase the materials for its signature handbags for $3 less per bag. If everything is kept the same, what effect would this reduction in material cost have on the breakeven point for Forster’s Fashion Bags?

Now, assume that the sales manager decides to reduce the selling price of each handbag by $3. What would be the net effect of both changes be on the breakeven point in units for Forster’s Fashion Bags?

Would you recommend a different approach to the purchasing manager if the results are not favorable to the organization? Please explain.

Answer 1

Break even point is calculated as fixed costs/ contribution per unit

Contribution per unit is revenue minus the variable cost

1. Thus if fosters fashion bags variable cost is reduced by $3 per unit, the contribution per unit will increase by $3 per unit.

This will reduce the break even point for fosters fashion bags as the denominator will increase

2. Now if the selling price of each unit is reduced by $ 3 each, it will decrease the contribution per unit

Therefore as the denominator for break even point calculation will decrease, the break even point for fosters fashion bags will increase.

3. If both the changes are done, i.e selling price per unit reduced by $3 and the variable cost is also reduced by $3, the contribution per unit will remain unchanged. Thus the break even point will also remain unchanged

4. Reducing fixed costs will also impact the break even point hence the purchasing manager can also look at reducing fixed costs to reduce the break even point