What effect does increasing fixed costs have on break-even point?

When fixed costs increase, the break-even point rises. The break-even point is the level of sales at which total revenues equal total costs, meaning no profit or loss is incurred. Fixed costs are the expenses that do not change with the level of output or sales, such as rent, salaries, or insurance. When these fixed costs increase, the total costs that need to be covered by sales also increase.

To maintain the same level of operation and avoid a loss, a company must generate a higher amount of sales revenue to cover the new, higher fixed costs. Therefore, the break-even point—the number of units that need to be sold to cover fixed and variable costs—will increase as fixed costs become larger.

While the contribution margin does play a role in determining how much revenue is needed to break even, the direct impact of increasing fixed costs is to raise the break-even point itself. Understanding this relationship is crucial for managers and decision-makers when considering pricing strategies and cost control measures.