Break Even Analysis

A variable cost is a cost that

• varies per unit at every level of activity

• occurs at various times during the year

• varies in total in proportion to changes in the level of activity.

• may or may not be incurred, depending on management's discretion.

Answer explanation

A variable cost is defined as a cost that varies in total in proportion to changes in the level of activity. This means that as production or activity levels increase or decrease, the total variable cost will change accordingly.

A cost which remains constant per unit at various levels of activity is a

• variable cost.

• fixed cost.

• mixed cost.

• manufacturing cost.

Answer explanation

A variable cost remains constant per unit regardless of the level of activity. In contrast, fixed costs do not change with activity levels, and mixed costs have both fixed and variable components.

A fixed cost is a cost which

• varies in total with changes in the level of activity.

• remains constant per unit with changes in the level of activity.

• varies inversely in total with changes in the level of activity.

• remains constant in total with changes in the level of activity.

Answer explanation

A fixed cost remains constant in total regardless of changes in the level of activity. This means that even if production increases or decreases, the total fixed cost does not change.

Which of the following is not a fixed cost?

• Direct materials

• Depreciation

• Lease (rent) charge

• Property taxes

Answer explanation

Direct materials are variable costs that change with production levels, unlike depreciation, lease charges, and property taxes, which remain constant regardless of output.

Contribution margin

• is always the same as gross profit margin.

• excludes variable selling costs from its calculation.

• is calculated by subtracting total manufacturing costs per unit from sales revenue per unit.

• equals sales revenue minus variable costs.

Answer explanation

The contribution margin is defined as sales revenue minus variable costs. This reflects the amount available to cover fixed costs and generate profit, making this choice the correct answer.

Leo's business has sales of £500,000 and variable costs of £300,000. What is the contribution margin ratio?

• 67%

• 40%

• 60%

• N/A

Answer explanation

The contribution margin is calculated as (Sales - Variable Costs) / Sales. Here, it is (500,000 - 300,000) / 500,000 = 200,000 / 500,000 = 0.4 or 40%. Thus, the correct answer is 40%.

Jacob runs a small business selling handmade candles with a contribution margin of £12 per unit, fixed costs of £148,800, and sales for the current year of £200,000. How much is Jacob’s break-even point?

• 9,200 units

• $51,200

• 12,400 units

• 4,267 units

Answer explanation

To find the break-even point, divide fixed costs by the contribution margin: £148,800 / £12 = 12,400 units. Thus, Jacob’s break-even point is 12,400 units.

Hess, Inc. sells a product with a contribution margin of £12 per unit and selling price per unit of £20, fixed costs of £148,800, and sales for the current year of £200,000. How much is Hess’s break-even point level of sales in pounds?

• £148,800

• 12,400

• £248,000

• £99,200

Answer explanation

To find the break-even point in sales, use the formula: Break-even sales = Fixed costs / Contribution margin ratio. Contribution margin ratio = Contribution margin / Selling price = £12 / £20 = 0.6. Break-even sales = £148,800 / 0.6 = £248,000.

Sutton Company produces flash drives for computers, which it sells for £20 each. The variable cost to make each flash drive is £13. During April, 700 drives were sold. Fixed costs for April were £2 per unit for a total of £1,400 for the month. How much is the monthly break-even level of sales in pounds for Sutton Company?

• £200

• £4,000

• £14,000

• £8,400

Answer explanation

To find the break-even sales in pounds, calculate fixed costs plus variable costs per unit. Fixed costs are £1,400. Contribution margin per unit is £20 - £13 = £7. Break-even units = £1,400 / £7 = 200. Thus, break-even sales = 200 * £20 = £4,000.

The break-even point is where

• total sales equal total variable costs.

• contribution margin equals total fixed costs.

• total variable costs equal total fixed costs.

•       total sales equal total fixed costs.

Answer explanation

The break-even point occurs when the contribution margin, which is total sales minus variable costs, equals total fixed costs. This means the business covers all its fixed expenses without making a profit or loss.