Reference no: EM131452408

What effect could the following changes, occurring independently have on (1) the break-even point, (2) the unit contribution margin, and (3) the expected total profit?

a) An increase in fixed costs

b) A decrease in wage rates applicable to direct, strictly variable labor

c) An increase in the selling price of the product

d) An increase in production and sales volume

e) An increase in building insurance rates

If companies that are operating below the break-even point cannot raise prices, what must they do to break even?

Wolf Broadcasting operated at the break-even point of $2,250,000 during year 1 while incurring fixed costs of $1,000,000.  Management is considering two alternatives to reduce the break-even level.  Alternative A trims fixed costs by $200,000 annually with no change in variable cost per unit; doing so, however, will reduce the quality of the product and result in a 10 percent decrease in selling price, but no change in the number of units sold.  Alternative B substitutes automated equipment for certain operations now performed manually.  Alternative B will result in an annual increase of $300,000 in fixed costs but a 5 percent decrease in variable costs per barrel produced, with no change in product quality, selling price, or sales volume.

a) What was the total contribution margin (contribution margin per unit times number of units sold) during Year 1?

b) What is the break-even point in sales dollars under alternative A?

c) What is the break-even point in sales dollars under alternative B?

d) What should the company do?