Discussion
Put the steps of a break-even calculation in order.
1. Divide the fixed cost by the contribution 2. Separate costs into fixed and variable 3. Compare the result with expected sales to get the margin of safety 4. Compute the contribution per unit
Answer: A
Correct answer: 2, 4, 1, 3
Costs must first be separated into fixed and variable, since nothing else can be done until they are. The contribution per unit follows from the price and the variable cost. Dividing the fixed cost by that contribution gives the break-even quantity. And comparing it with expected sales gives the margin of safety, which is what the exercise was for.
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