Question

3) a company has fixed costs of $50,000 and variable costs of $2 per item. What will happen to the break even point if they lower their fixed costs to $30,000 and increase their variable cost to $3 per item? Assume the sales price per item is $6. Which situation is better for the economy if the economy is predicted to be weak in the near future?

Answer 1

Hello Sir/ Mam

		Case I	Case II
	Sale Price per unit	6	6
-	Variable Cost per unit	2	3
=	Contribution per unit	4	3
	Total Fixed Costs	50000	30000
	Break-even point	12500	10000

Hence, break even point decreases by 2500 units.

Situation II is better if the economy is predicted to be weak in the near future, as there will be lesser demand and hence, it will be easier for the company if it has a lesser burden of fixed cost.

Thanks!

Please drop an upvote if you find this helpful.