The process of breaking even involves the condition where there is no profit or loss by a Company; it is a situation of just nominal profits. This means that at the state of break even, a Company’s revenues are equal to the borne expenses. In order to raise the amount of profits earned, a Company should be able to create higher revenues in comparison to the overall costs (Hammel, Goulet, & United States, 1989).
In the given case, we could study the relation between selling price change and the changes in break-even point since the owner is considering adjustments. Given that the determination of a break-even point is mostly based on total costs, there is no direct effect of the revenues towards the break-even point. However, the selling price will affect the break-even point because of its involvement in the calculation of a contribution margin. If the selling price is increased, the contribution margin will increase and as a result, the break-even point will be reduced (Cafferky & Wentworth, 2010). Though, this relation should keep in consideration that the consumers are not price elastic when the prices are increased. The results will thus be the opposite when the selling price is decreased i.e. the break-even will increase.
The increase in variable costs will necessarily increase the break-even point. An increase in variable costs means that the contribution margin is reduced. This is true for situations when the variable costs are increased without increasing the selling prices (AccountingCoach.com, 2016). A lesser contribution margin would mean that there is need of higher sales for covering the fixed expenses of all sorts.
An increase in the fixed cost will also cause the break-even to rise. When the fixed prices are reduced, it implies that few number of unit sales could also recover the expenses.
References
AccountingCoach.com,. (2016). What causes an increase in break-even point? | AccountingCoach. Retrieved 8 February 2016, from http://www.accountingcoach.com/blog/break-even-point
Cafferky, M. E., & Wentworth, J. (2010). Breakeven analysis: The definitive guide to cost-volume-profit analysis. New York: Business Expert Press.
Hammel, F. C., Goulet, P. G., & United States. (1989). Breakeven analysis: A decision-making tool. Washington, D.C.?: U.S. Small Business Administration, Office of Business Development.
