How does an increase in costs affect the break-even point?

An increase in costs directly impacts the break-even point by raising the amount of revenue that a business needs to generate to cover its expenses. The break-even point is the level of sales at which total revenues equal total costs, meaning the business is neither making a profit nor incurring a loss.

When costs increase—whether these are fixed costs (like rent or salaries) or variable costs (like raw materials)—the total costs that need to be covered also increase. As a result, the business must sell more units to reach the new break-even point. For example, if a company's fixed costs rise due to higher rent, or if the cost of goods sold increases, the company must work to recoup those additional expenses through increased sales volume.

In essence, as the costs increase, the threshold for profitability shifts upward, leading to a higher break-even point. This means that in order to maintain the same level of profitability, a company needs to sell more products or services than before.