Would each of the following increase, decrease, or have an indeterminant 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.
Please tell us what you think the answers are, and we'll be glad to check them for you.
A) Decrease B) Increase C) Indeterminate D) decrease
To determine the effects of each scenario on a firm's breakeven point (unit sales), we need to understand the concept of a breakeven point. The breakeven point is the level of sales at which a company's total revenue equals its total costs, resulting in neither profit nor loss.
Now let's evaluate each scenario:
a. An increase in the sales price with no change in unit costs:
In this scenario, if the sales price increases while the unit costs remain the same, the contribution margin per unit will increase. The contribution margin represents the amount that each unit contributes toward covering the fixed costs and generating profit. With an increase in contribution margin, the breakeven point will decrease, meaning the firm would need to sell fewer units to cover its costs and reach the breakeven point. Therefore, the breakeven point would decrease.
b. An increase in fixed costs accompanied by a decrease in variable costs:
When fixed costs increase, the breakeven point increases because the firm must sell more units to cover the higher fixed costs. However, if variable costs decrease, the contribution margin per unit increases, which reduces the number of units needed to cover the fixed costs. The net effect of these two factors depends on the magnitude of the changes in fixed costs and variable costs. Therefore, the effect on the breakeven point would be indeterminate without additional information.
c. A new firm decides to use MACRS depreciation for both book and tax purposes rather than the straight-line depreciation method:
Depreciation affects a company's fixed costs. MACRS (Modified Accelerated Cost Recovery System) is a tax depreciation method that allows for faster write-offs of assets compared to straight-line depreciation. By using MACRS, the firm can claim higher depreciation deductions in the earlier years, which reduces taxable income and lowers the tax liability. This results in a decrease in fixed costs due to reduced tax payments. As a result, the breakeven point would decrease since the fixed costs are lower.
d. Variable labor costs decline; other things are held constant:
If variable labor costs decline while other factors remain constant, the contribution margin per unit will increase. This is because the variable costs per unit are lower, which implies that each unit contributes more towards covering the fixed costs. As a result, the breakeven point would decrease since the contribution margin per unit has increased.
In summary:
a. Increase in the sales price with no change in unit costs would decrease the breakeven point.
b. Increase in fixed costs accompanied by a decrease in variable costs would have an indeterminate effect on the breakeven point without additional information.
c. The decision to use MACRS depreciation would decrease the breakeven point.
d. A decline in variable labor costs would decrease the breakeven point.