Would each of the following increase, decrease, or have an in determinant effect on a firm’s breakeven point (unit sales)?
a. An increase in the sales price with no change in unit costs.
b. An increase in fixed costs accompanied by a decrease in variable costs.
c. A new firm decides to use MACRS depreciation for both book and tax purposes rather than the straight-line depreciation method.
d. Variable labor costs decline; other things are held constant.
To analyze the effect of each scenario on a firm's breakeven point (unit sales), we need to understand the relationship between sales, costs, and profits.
a. An increase in the sales price with no change in unit costs:
This scenario will increase the contribution margin (sales price minus unit costs) of each unit sold. As a result, the breakeven point (the point at which total revenue equals total costs) will decrease. Therefore, an increase in the sales price with no change in unit costs will decrease the firm's breakeven point.
b. An increase in fixed costs accompanied by a decrease in variable costs:
An increase in fixed costs will increase the total costs of the firm, leading to a higher breakeven point. On the other hand, a decrease in variable costs will reduce the unit cost of each product sold. This reduction in unit costs will increase the contribution margin and, subsequently, decrease the breakeven point. The overall effect of this scenario on the breakeven point will depend on the magnitude of the changes in fixed and variable costs.
c. A new firm decides to use MACRS depreciation for both book and tax purposes rather than the straight-line depreciation method:
MACRS depreciation allows for accelerated depreciation deductions, which results in higher depreciation expenses in the early years of an asset's life. By increasing depreciation expenses, the firm's costs will increase, thereby increasing the breakeven point.
d. Variable labor costs decline; other things are held constant:
When variable labor costs decline, the unit cost of production decreases, resulting in an increased contribution margin per unit sold. This decrease in unit costs will lower the firm's breakeven point since the firm needs to sell fewer units to cover its fixed costs.
In summary:
a. Increase in sales price with no change in unit costs: Decrease in breakeven point.
b. Increase in fixed costs accompanied by a decrease in variable costs: Indeterminate effect (depends on the magnitude of the changes).
c. Use of MACRS depreciation for book and tax purposes: Increase in breakeven point.
d. Decline in variable labor costs: Decrease in breakeven point.
a. An increase in the sales price with no change in unit costs would decrease the firm's breakeven point (unit sales). This is because a higher sales price means that each unit sold generates more revenue, which can help cover a larger portion of the fixed costs.
b. An increase in fixed costs accompanied by a decrease in variable costs would have an indeterminate effect on the firm's breakeven point. This is because while the decrease in variable costs can help decrease the breakeven point (as each unit sold generates more contribution margin), the increase in fixed costs would counteract this effect.
c. Using MACRS depreciation for both book and tax purposes rather than the straight-line depreciation method would have no impact on the firm's breakeven point. Depreciation affects the company's net income, but the breakeven point is solely dependent on the firm's revenue and costs.
d. If variable labor costs decline while other things are held constant, it would decrease the firm's breakeven point. This is because lower variable labor costs mean that each unit sold generates more contribution margin, helping the firm cover their fixed costs with fewer unit sales.