How does an increase in fixed costs affect a firm?

An increase in fixed costs affects a firm primarily by raising the amount of sales needed to break even. Fixed costs are expenses that do not change with the level of output or sales, such as rent, salaries, and insurance. When fixed costs rise, the total costs incurred by the firm increase, which means that higher revenue is needed to cover those costs.

To break even, a firm must generate enough revenue to cover both its fixed and variable costs. If the fixed costs go up, the contribution margin per unit—the amount each sale contributes to fixed costs and profit—remains the same unless prices or variable costs change. Thus, to maintain the same level of profitability, the company needs to sell more units to cover the increased fixed costs, which raises the break-even point.

In contrast, other options do not adequately capture the specific relationship between fixed costs and the break-even analysis. While an increase in fixed costs would decrease operating income if sales do not increase to offset those costs, the primary impact is the requirement for higher sales to achieve break-even. Therefore, it's correct to conclude that an increase in fixed costs increases the required sales to break even.