Break Even Analysis Questions and Answers

Answer: A

Rent, insurance, depreciation and salaried staff continue whether the plant runs flat out or stands idle. They are fixed with respect to volume, not with respect to time, and most of them do change over a long enough period.

Answer: B

Correct answer: the volume of output

A variable cost is incurred per unit made, so it rises and falls with the quantity produced - materials, piece-rate labour, power consumed by the process. A fixed cost is incurred per period regardless of output, and it is the separation of the two that makes break-even analysis possible at all.

Answer: C

Correct answer: a fixed element and a variable element

A semi-variable or mixed cost has a standing charge plus a usage charge - a telephone line rental with call charges, a maintenance contract with additional call-outs, supervision with overtime. Before break-even analysis can be applied such costs must be split into their two parts, usually by the high-low method or by regression on past data.

Answer: D

Correct answer: straight over the relevant range of output

Linearity is the central assumption. Total cost is taken as fixed cost plus a constant variable cost per unit, which gives a straight line, and revenue likewise. It holds only over the relevant range - the band of output within which the fixed costs do not step up and the variable cost per unit does not change through bulk discounts, overtime premiums or diminishing returns. Outside that band the analysis does not apply.

Answer: A

Correct answer: falls as output rises

The total fixed cost is unchanged, so spreading it over more units reduces the amount each must bear:

This is the whole of what is meant by economies of scale in the short run, and it is why a plant running below capacity has such difficulty competing with one running full.

Answer: B

Correct answer: variable cost per unit

Contribution is what each unit sold contributes towards the fixed costs and, once those are covered, towards profit:

It is not profit per unit, since no fixed cost has yet been deducted. Every break-even calculation rests on this quantity, and the whole method can be summarised as asking how many contributions are needed to pay for the fixed costs.

Answer: C

Correct answer: contribution per unit

The break-even quantity is the number of units whose contributions just cover the fixed cost:

Dividing by the price would ignore the variable cost each unit incurs, and dividing by the variable cost has no meaning at all. The relation makes the two levers plain: reduce the fixed cost or raise the contribution.

Answer: D

Correct answer: sales revenue

The contribution margin ratio is

the proportion of each sales rupee left after the variable costs of that sale. It is used when the break-even is wanted in money rather than in units, which is essential where a firm sells several products or cannot meaningfully count units.

Answer: A

Correct answer: contribution margin ratio

Dividing by the ratio converts the fixed cost into the sales value needed to cover it:

which is the same answer as \( Q_{BE} \times p \). The ratio form is the more useful of the two in practice, since a firm with many products can compute an overall margin ratio from its accounts without counting units at all.

Answer: B

Correct answer: total fixed cost

Break-even is defined as the point where profit is zero, and profit is total contribution less fixed cost, so at that point the two are equal. Below it the contributions have not yet paid for the fixed cost and the firm makes a loss; above it every further contribution is profit. This is the single most useful way to hold the whole method in mind.