Question

Please explain how to calculate Break-Even in units and Sales dollars using the Contribution Margin Approach. Please explain the impact to Break-Even (increase,decrease,remain the same) under the following three different scenarios: 1. increase in fixed costs 2.increase in variable costs 3. increase in sales per unit (please type out answer)

Answer 1

Breakeven point is the point at which there will be no profit, no loss and while talking about the contribution margin approach point at which the Contribution margin is equal to Fixed costs.

Breakeven point in units = Fixed costs / Contribution margin per unit

Breakeven point in sales dollars = Fixed costs / Contribution margin ratio
Contribution margin ratio = Contribution margin / Sales

Impact on Breakeven :
1). Increase in Fixed costs = Here Breakeven point will increase because the contribution margin per unit will remain the same.
2). Increase in Variable costs = Here Breakeven point will increase because of contribution margin decreases while fixed costs will remain the same.
3). Increase in sales per unit = Here Breakeven point will decrease because due to higher selling price per unit, contribution margin will increase and hence breakeven point will be at less units or less sales dollars.