What happens to the break-even point when sales prices increase?

When sales prices increase, the break-even point decreases, assuming all other factors remain constant.

The break-even point is the point at which total revenue equals total costs, meaning the business is neither making a profit nor a loss. It is calculated by dividing the total fixed costs by the contribution margin ratio (the selling price per unit minus the variable cost per unit). Therefore, if the selling price per unit increases, the contribution margin ratio also increases, leading to a decrease in the break-even point.

Let's illustrate this with an example. Suppose a company has fixed costs of £10,000, a selling price per unit of £50, and a variable cost per unit of £30. The contribution margin ratio is £20 (£50 - £30), so the break-even point is 500 units (£10,000 / £20). Now, if the selling price per unit increases to £60, the contribution margin ratio becomes £30 (£60 - £30), and the break-even point decreases to approximately 333 units (£10,000 / £30).

This decrease in the break-even point means that the company needs to sell fewer units to cover its costs, which can be beneficial in terms of cash flow and risk management. However, it's important to note that this is a simplified example. In reality, increasing the selling price may affect the demand for the product, and therefore the number of units sold. It could also potentially lead to an increase in variable costs, due to factors such as higher commission rates for sales staff. Therefore, while the basic principle that an increase in selling price leads to a decrease in the break-even point holds true, the actual impact on a business can be more complex and depends on a range of factors.

IB Business Management Tutor Summary: In simple terms, when a company charges more for what it sells (increase in sales prices), it doesn't need to sell as much to pay off its costs, making the break-even point lower. This means the business can reach its no-profit-no-loss point quicker. However, real-world situations like changes in demand or costs can make the actual outcome more complex.