Smith Pharmaceuticals is trying to estimate the breakeven volume of sales on a newly developed drug. Which of the following would be expected to reduce the number of pills Smith would need to sell to breakeven (i.e., which would result in a lower breakeven volume) assuming everything else remains the same?

a. An increase in total fixed costs
b. A decrease in the selling price per pill
c. An increase in the variable cost per pill
d. An increase in the unit (per pill) contribution margin
e. An increase in allocated overhead (indirect) costs

An increase in the unit (per pill) contribution margin.

Explanation:

Breakeven point is defined as the level of sales where total cost is equal to total revenue.

The formula is given as

Breakeven= Fixed cost ÷ (Sales revenue -Variable cost)

Note the Sales revenue less variable cost is the contributing margin.

Breakeven= Fixed cost ÷ Contributing margin

To reduce breakeven we must either reduce the numerator or increase the denominator.

In this case an increase in contributing margin will result in a decrease in breakeven amount of the company.

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