A company increased the selling price for its product from $1.00 to $1.20 a unit when total fixed costs increased from $400,000 to $450,000 and variable cost per unit remained unchanged. How would these changes affect the break-even point?

The break -even units will decrease

Explanation:

Under the CVP analysis method, the break-even point is determined by dividing the fixed cost by the contribution margin per unit.

i.e.,  Break-even point equal to  fixed cost

   contribution margin per unit

The contribution margin per unit is obtained by subtracting variable costs from the selling price.

For this company, there have been changes in the selling price and the fixed costs.

The price has changed from $1.00 to $1.20, as a percentage change

=$1.20 -1.00 = $0.20

=$0.20/1 x 100 =20% increase in price

The fixed costs have changed from 400,000 to 450,000, as a percentage change

=$450,000 -$400,000= $50,000

=$50,000/ $400,000  x 100 = 12.5 %

The selling price has increased by a bigger percentage than the fixed costs.

In calculating the break-even point,  The numerator (fixed will have increased by a smaller margin compared to the contribution margin per unit.

Mathematically, the break-even units will decrease, the denominator will be relatively greater than the numerator

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