Question

If a company decreases its selling price by $4 per unit, due to a decrease in its direct material cost of $4 per unit, the break-even point in units will?

Answer 1

There would no change in the break-even point .

What is breakeven point?

It is the point at which the firm makes zero profit, I mean the number of units the firm needs to sell in order to cover all costs, such that revenue is the same as total costs.

Initially, breakeven point is the fixed costs divided by the contribution margin per unit(i.e. selling price minus variable cost per unit)

Let assume fixed cost is $100,000

Selling price=$40

variable cost=$20

Initial breakeven point=$100,000/($40-$20)

Initial breakeven point=5,000 units

Now selling price and variable cost would reduce by $4 each

breakeven point now=$100,000/($36-$16)

breakeven point now=5,000 units

Overall, the breakeven point would remain the same before the reduction in selling price and variable cost as well as after the reduction.

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