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If fixed costs attendant to a product increased while variable costs and sales price remain constant, what will happen to contribution margin (CN) and breakeven point (BEP)?

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Answer:

  • Contribution margin = No effect
  • Breakeven Point (BEP) = Increases

Explanation:

Contribution margin would not change because fixed costs do not affect the contribution margin formula. Formula is:

= Sales - Variable cost

As for breakeven point, it will have to increase because more costs are being incurred means more cost to overcome and get to a breaking point.

Formula for breakeven point is :

= Fixed cost / Contribution margin

Notice that in the formula, if Fixed costs increase, the breakeven point will be longer because the numerator became higher than it was.

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