ACCA Performance Management (F5) Certification Practice Exam

Which of the following would increase the breakeven point?

1. A reduction in fixed costs

2. An increase in the contribution per unit

3. An increase in fixed costs

4. A decrease in sales price

The correct answer is: An increase in fixed costs

The correct answer is rooted in the relationship between fixed costs, contribution margin, and breakeven analysis. The breakeven point is calculated as the total fixed costs divided by the contribution margin per unit. Fixed costs are expenses that do not change with the level of production or sales, such as rent, salaries, and insurance. When fixed costs increase, this means that a business needs to sell more units to cover these fixed costs before it begins making a profit. Therefore, a rise in fixed costs directly raises the breakeven point. For example, if a company's fixed costs rise from $10,000 to $15,000 while the contribution margin remains the same, the number of units that must be sold to break even will increase accordingly. In contrast, a reduction in fixed costs would lead to a lower breakeven point, as less contribution is needed to cover a smaller fixed cost burden. Similarly, an increase in contribution per unit or a decrease in sales price would also impact the breakeven point by either reducing the number of units needed to break even (increased contribution margin) or increasing the number of units needed to be sold (lower sales price), but they would not lead to an increase in the breakeven point