Question

In a few brief sentences attack or defend the following statement - It is a true statement that if the fixed expenses of an organization double, then the break-even point in units would double. Provide support for your conclusion.

Answer 1

Answer: I choose to defend it

Explanation:

The formula for the breakeven point is;

= Fixed expenses/ Contribution margin

If the fixed expenses were to double without the contribution margin changing, the breakeven point in units would have to double as well.

For instance, assume Fixed expenses are $400,000 and the Contribution margin is $4,000. The breakeven point would be;

= 400,000/4,000

= 100 units

Assume fixed expenses double to $800,000 and contribution margin remains unchanged at $4,000. New breakeven point will be;

= 800,000/4,000

= 200 units

Statement is proven that should the fixed expenses double, the breakeven point would double as well.