The correct answer is C. An increase in fixed costs will result in an increase in the break-even point sales level.
The break-even point is the point at which a company’s revenues equal its costs. It is calculated by dividing fixed costs by the contribution margin per unit. The contribution margin is the difference between the selling price per unit and the variable cost per unit.
When fixed costs increase, the break-even point increases. This is because the company must now sell more units in order to cover its fixed costs.
For example, let’s say a company has fixed costs of $100,000 and a contribution margin per unit of $20. The break-even point is 5,000 units. If the company’s fixed costs increase to $150,000, the break-even point will increase to 7,500 units.
This is because the company now needs to sell 2,500 more units in order to cover the additional $50,000 in fixed costs.
The following are the explanations of each option:
A. A decrease in the contribution sales ratio. The contribution sales ratio is the percentage of sales that is available to cover fixed costs and contribute to profit. When fixed costs increase, the contribution sales ratio decreases. This is because the company now has a smaller percentage of sales available to cover its fixed costs.
B. A decrease in the contribution per point. The contribution per point is the amount of revenue that is generated for each unit of fixed cost. When fixed costs increase, the contribution per point decreases. This is because the company now needs to sell more units in order to cover its fixed costs.
C. An increase in the break-even point sales level. The break-even point is the point at which a company’s revenues equal its costs. It is calculated by dividing fixed costs by the contribution margin per unit. When fixed costs increase, the break-even point increases. This is because the company must now sell more units in order to cover its fixed costs.
D. An increase in the margin of safety. The margin of safety is the difference between the company’s sales and its break-even point sales. When fixed costs increase, the margin of safety decreases. This is because the company now has a smaller cushion between its sales and its break-even point.