Break Even Analysis Questions and Answers

Answer: C

Correct answer: break-even sales

The margin of safety is how far sales can fall before the firm begins to lose money:

usually expressed as a percentage of actual sales. A narrow margin means a small downturn takes the firm into loss, which is the practical measure of how exposed it is.

Answer: D

More contribution must be earned before the larger fixed cost is covered, so more units have to be sold. The slope of the total cost line is unchanged and only its intercept rises, which is the signature of a fixed cost change.

Answer: A

Correct answer: upward, by reducing the contribution per unit

A higher variable cost leaves less contribution per unit, so more units are needed to cover the same fixed cost and the break-even quantity rises. On the chart the total cost line steepens while the revenue line is unchanged, so the two cross further to the right. The fixed cost is untouched, and variable cost affects the break-even point precisely because it affects contribution.

Answer: B

Correct answer: downward

A higher price raises the contribution per unit, so fewer units are needed to cover the fixed cost and the break-even quantity falls - the revenue line steepens and crosses the unchanged cost line sooner. The obvious caution is that this holds other things equal, and a price rise usually reduces the volume that can be sold.

Answer: C

Correct answer: fixed cost

Operating leverage measures how strongly profit responds to a change in volume, and it is high when fixed costs are large relative to variable. A capital-intensive firm has a high contribution margin but a heavy fixed burden, so once past break-even each additional unit adds a great deal of profit - and each unit lost takes away just as much.

Answer: D

Correct answer: very sensitive to a fall in volume

High leverage cuts both ways: the large contribution margin that multiplies profit on the way up multiplies losses on the way down, and the fixed costs continue regardless. A firm with high fixed costs and a narrow margin of safety is therefore acutely exposed to a downturn, which is why such firms watch their capacity utilisation so closely.

Answer: A

Correct answer: raises fixed cost and lowers variable cost

Automation substitutes capital for labour: the machine must be bought, housed, financed and depreciated whether it runs or not, while the labour it displaces was a cost per unit. The break-even point therefore moves to a higher volume, but beyond it the wider contribution margin makes profit grow faster. The decision is thus a judgement about expected volume, not about cost per unit alone.

Answer: B

Below that output the alternative with the lower fixed cost is the cheaper, and above it the one with the lower variable cost per unit. It is also called the cost indifference point, since either choice costs the same there.

Answer: C

Correct answer: lower variable cost per unit

Above the indifference volume the option with the steeper fixed cost but the flatter variable cost has pulled ahead, because the volume is large enough for the saving per unit to have repaid the extra fixed cost. Below that volume the reverse holds. The first cost and the payback period describe the investment but do not by themselves say which is cheaper at a given output.

Answer: D

Correct answer: sales mix between the products

With several products there is no single contribution per unit, so a break-even in units is meaningless until it is assumed that the products sell in a fixed proportion. That assumed mix allows a weighted average contribution to be computed and a break-even found - but the answer is valid only at that mix, and a shift in mix moves the break-even point without any change in prices or costs.