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Posted: January 18th, 2023
Would an increase in variable costs per unit cause a company’s break-even
Discuss your answers to the following questions:
Would an increase in variable costs per unit cause a company’s break-even point to increase or decrease? Why
Would an increase in unit selling price cause a company’s break-even point to increase or decrease? Why?
An examination of the accounting records of Alinma Company disclosed a high contribution margin ratio and production at a level below maximum capacity. Based on this information, discuss a likely means of improving operating income. Explain your answer by sharing the calculations needed.
Both Alireza Company and Jarir Company had the same unit sales, total costs, and operating income for the current fiscal year; yet, Alireza Company had a lower break-even point than Jarir Company. Discuss the reason for this difference in break-even points and provide and example of this calculation.
You’ll need to implement materials in your answer. Its a MUST, and highlighted wherever you used.
Ciftci, M., & Zoubi, T. A. (2019). The magnitude of sales change and asymmetric cost behavior. Journal of Management Accounting Research, 31(3), 65–81.
Huang, W., & Kim, J. (2020). Linguistically induced time perception and asymmetric cost behavior. Management International Review (MIR), 60(5), 755–785.
And the attachment.
Your answer should be between 200 to 250 words for each question. Plagiarism MUST not exceed 5%, and plagiarism report is required, or the paper cannot be accepted.
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-SAMPLE ANSWER-
An increase in variable costs per unit would cause a company’s break-even point to increase. This is because as variable costs per unit increase, the total variable costs increase, causing the company to need to sell more units in order to reach the break-even point, the point where total revenue equals total costs.
An increase in unit selling price would cause a company’s break-even point to decrease. This is because an increase in unit selling price would increase total revenue while total costs remain the same, meaning the company would need to sell fewer units in order to reach the break-even point.
Based on the information provided, Alinma Company could improve operating income by increasing production to reach maximum capacity, as they have a high contribution margin ratio. The contribution margin ratio, calculated as (selling price – variable costs per unit) / selling price, is used to determine the proportion of each sales dollar that contributes to fixed costs and ultimately operating income. A higher ratio indicates a higher margin per unit and greater potential for increased operating income. The calculation for this can be done by multiplying the increase in number of units produced by the contribution margin ratio and added to the existing operating income. (e.g. Operating income + (additional units produced*contribution margin ratio) = New operating income)
The difference in break-even points between Alireza Company and Jarir Company is likely due to a difference in fixed costs. Fixed costs, such as rent and salaries, remain constant regardless of the number of units sold. Alireza Company likely has lower fixed costs than Jarir Company, which would mean that they reach their break-even point at a lower number of unit sales. A calculation to determine this can be done by dividing the fixed costs by the contribution margin (e.g. fixed costs / (selling price – variable costs) = break-even point in units).
References
Ciftci, M., & Zoubi, T. A. (2019). The magnitude of sales change and asymmetric cost behavior. Journal of Management Accounting Research, 31(3), 65–81.
Huang, W., & Kim, J. (2020). Linguistically induced time perception and asymmetric cost behavior. Management International Review (MIR), 60(5), 755–785.
Attached document as well, Should be related to Alinma and Alireza Company and Jarir Company.
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