ITPEC IP October 2023 Question 66

Cutting labor costs and restructuring indirect departments — it lowers fixed costs, and break-even sales fall with them.

Break-even sales = fixed costs ÷ (1 − variable cost ratio). They depend only on fixed costs and the variable cost ratio, not on how much is actually sold.

• •Example: fixed costs 400, variable cost ratio 0.6 gives 400 ÷ 0.4 = 1,000
• •Cut fixed costs to 320: 320 ÷ 0.4 = 800, so break-even sales drop

Labor costs of indirect departments and overheads are largely fixed costs, so reducing them lowers the break-even point.

Answer (b)

Why not others:

• •(a) — new facilities add depreciation and other fixed costs, which raises break-even sales
• •(c) — selling more at the same price raises profit, but fixed costs and the variable cost ratio are unchanged, so the break-even point stays where it is
• •(d) — a lower price with the same unit cost raises the variable cost ratio, which shrinks the margin and raises break-even sales

Key rule: Break-even sales fall only when fixed costs fall or the variable cost ratio falls; sales volume itself does not move the break-even point.

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