Asked by Patel Fenil on May 31, 2024
Verified
A firm is reorganising and reclassifying its cost structure. The firm previously classified the item 'glue and nails' as indirect material. The firm is considering now tracing this cost directly to products and treating 'glue and nails' as direct material. What is the effect on the break-even point (if any) of that change, provided all other items remain unchanged?
A) The break-even point will not change.
B) The break-even point will increase.
C) The break-even point will decrease.
D) The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.
Break-Even Point
The point at which total costs equal total revenues, meaning the business is not making a profit or a loss.
Direct Material
Raw materials that can be physically and directly associated with the finished product during the manufacturing process.
Indirect Material
Materials used in the production process but not directly traceable to a finished product, such as lubricants for machinery.
- Scrutinize the arrangements of costs to ascertain the impact of changes in fixed and variable outlays on profit levels and break-even points.
Verified Answer
SS
Satoya ShelleyJun 01, 2024
Final Answer :
A
Explanation :
Classifying 'glue and nails' as direct instead of indirect materials does not change the total cost structure, only how costs are categorized. The total costs and revenue needed to reach the break-even point remain unchanged.
Learning Objectives
- Scrutinize the arrangements of costs to ascertain the impact of changes in fixed and variable outlays on profit levels and break-even points.