Break Even Analysis Questions and Answers

Answer: A

Correct answer: raises the overall break-even point

The weighted average contribution falls when the mix moves towards the lower-margin product, so more units must be sold to cover the same fixed cost. This is why a firm can meet its revenue target and still miss its profit target - the money came in but from the wrong products, and the mix assumption behind the break-even calculation no longer holds.

Answer: B

Continuing to operate is worthwhile as long as it covers the costs that closing would avoid, since the unavoidable fixed costs continue either way. Comparing revenue with total cost would close plants that are still worth running.

Answer: C

Overhead that continues whether or not the item is made in-house is irrelevant, but any additional fixed cost caused by making it is not. Using the full absorbed cost is the commonest error and biases the decision toward buying.

Answer: D

Correct answer: price and cost per unit stay constant with volume

Linearity is the assumption most often violated in practice: prices are cut to move larger volumes, materials are bought at a discount in quantity, and overtime raises the labour cost per unit near capacity. Break-even analysis is therefore valid only over the relevant range in which those effects are small, and its answers should not be extrapolated far beyond it.

Answer: A

Correct answer: equal, with no change in stock

The analysis charts revenue and cost against a single quantity, which requires that everything produced is sold. If production exceeds sales, some fixed cost is carried forward in the value of the stock rather than charged against the period, and the profit reported differs from what the break-even chart shows. That divergence between marginal and absorption costing is one of the standard limitations of the method.

Answer: B

Correct answer: 15 000 units

The contribution per unit is \( 50 - 30 = 20 \), so

Dividing by the price of 50 instead would give 6000 and would ignore the variable cost each unit incurs - the commonest error in this calculation.

Answer: C

Correct answer: 750 000

The break-even sales value is the break-even quantity at the selling price:

The same answer follows from dividing the fixed cost by the contribution margin ratio, \( 300\,000/0.40 \), which is the route used where units cannot conveniently be counted.

Answer: D

Correct answer: 0.40

The contribution margin ratio is the contribution as a fraction of the price:

Forty paise of every rupee of sales is left after the variable costs of that sale, to cover fixed costs and then to become profit. The complement, 0.60, is the variable cost ratio.

Answer: A

Correct answer: 100 000

Profit is total contribution less fixed cost:

Equivalently, the 5000 units above break-even each contribute 20. The 400,000 answer is the total contribution and forgets to deduct the fixed cost, which is the whole point of the calculation.

Answer: B

Correct answer: 5000 units, or 25 per cent of sales

The margin of safety is the excess over break-even:

Sales could therefore fall by a quarter before the firm began to lose money. Twenty-five per cent is a moderate cushion; a firm with high fixed costs and a narrow margin is the one to worry about in a downturn.