Question

What causes an increase in break-even point?

Answer 1

There are several reasons why a company's break-even point will increase. One reason is an increase in the company's fixed costs, such as rent, depreciation, salaries of managers and executives, etc.

A second reason for an increase in a company's break-even point is a reduction in the contribution margin. Contribution margin is sales minus the variable costs and variable expenses. An increase in the variable costs and expenses without a corresponding increase in selling prices will cause the contribution margin to shrink. With less contribution margin, it will take more sales in order to cover the fixed costs and fixed expenses. Of course, a decrease in selling price will also increase the break-even point.

Another reason for a change in the break-even point is a change in the mix of products or services delivered. In other words, some products have higher contribution margins, and some products have lower contribution margins. If a company continues to sell the same total number of units of product, but a greater proportion of the units sold have a lower contribution margin, the company's break-even point will increase.