Question

Example 48: Fill in the effects of each of the following on breakeven point, operating income and net income using: 1 = increase, D = Decrease, NC = No Change. Breakeven point in units Net Income Breakeven point in dollars Operating Income Contribution Margin in dollars Contribution Margin Ratio Increase variable costs per unit Decrease variable costs per unit Increase variable costs in total Decrease variable costs in total Increase fixed costs Decrease fixed costs Increase selling price Decrease selling price Increase units sold Decrease units sold Increase tax rate Decrease tax rate

Answer 1

Situations				Breakeven point in units	Breakeven point in dollars	Operating income	Net income	Contribution margin in dollars	Contribution margin ratio
Increase variable costs per unit			(Note:1)	I	I	D	D	D	D
Decrease variable costs per unit				D	D	I	I	I	I
Increase variable costs in total			(Note:2)	NC	NC	D	D	NC	NC
Decrease variable costs in total				NC	NC	I	I	NC	NC
Increase fixed costs			(Note:3)	I	I	D	D	NC	NC
Decrease fixed costs				D	D	I	I	NC	NC
Increase selling price			(Note:4)	D	D	I	I	I	I
Decrease selling price				I	I	D	D	D	D
Increase units sold			(Note:5)	NC	NC	I	I	NC	NC
Decrease units sold				NC	NC	D	D	NC	NC
Increase tax rate			(Note:6)	NC	NC	NC	D	NC	NC
Decrease tax rate				NC	NC	NC	I	NC	NC
Breakeven point in units=Fixed costs/Contribution margin per unit
Breakeven point in dollars=Fixed cost/Contribution margin ratio
Contribution margin per unit=Selling price per unit-Variable costs per unit
Contribution margin ratio=Contribution margin per unit/Selling price per unit
Note:1
Increase in variable costs per unit will decrease contribution margin and thus it will increase break even point.
This will also reduce operating income and net income
Note:2
Increase in variable costs will decrease net income and operating income.
It will have no effect in break even point and contribution margin per unit and contribution margin ratio.
Note:3
Increase in fixed costs will increase break even point and it will reduce operating income and net income.
It will not have any effect on contribution margin
Note:4
Increase in selling price will increase contribution margin and thus it will decrease break even point.
Also it will increase Operating income and net income
Note:5
Increase in units sold will increase net income and operating income
It will have no effect in break even point and contribution margin per unit and contribution margin ratio.
Note:6
Increase in tax rate will decrease net income
It will have no effect in break even point,contribution margin per unit,contribution margin ratio and operating income