Break-Even Point Analysis
Read this text on break-even point analysis. It goes through the process of calculating the break-even point for cost analysis under different scenarios. Take notes on each of the following: define the break-even point, differentiate between fixed and variable costs, and write the formulas on how to calculate the break-even point, calculate the contribution margin, calculate the contribution margin ratio, and calculate the margin of safety.
The Break-Even Point
Practice Questions
1. When a business owner states that he or she is operating at a break-even point, we know that:
- Business revenues are equal to its fixed costs.
- Business revenues are equal to total costs, including both fixed and variable costs.
- Business revenues are equal projected revenues.
- Business revenues are equal to its variable costs.
2. In order to manage costs effectively (and to calculate the break-even point), a business owner or manager needs to be able to distinguish between fixed and variable costs. Which of the following statements accurately illustrates a fixed or variable cost?
- A bakery would consider the cost of flour, yeast, sugar, and other ingredients a variable cost.
- The monthly lease payment on a business' delivery vehicle is a variable cost.
- An online business that ships all of the product it sells would consider mailing boxes and envelopes a fixed cost.
- For a business like In-N-Out Burger, the cost of potatoes used to make french fries is a fixed cost.
- fixed costs divided by the contribution margin per unit.
- revenues minus expenses.
- revenues minus total costs divided by quantity.
- fixed costs divided by variable costs.