Question

Breakeven point is the ratio of which of the following cost to contribution margin per unit ?

• A. Capital cost
• B. Variable cost
• C. Fixed cost
• D. Product of capital cost and variable cost

Hint:

To remember this relationship: the contribution margin from each unit sold goes toward paying off the business's "Fixed Costs." Once those fixed costs are fully covered, the business reaches its break-even point.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Break-even analysis is an economic tool used to determine the level of production or sales at which a business covers all its operating costs, resulting in neither profit nor loss.
The break-even point can be calculated in terms of sales volume (units) or sales revenue.
Key Formula or Approach:
The formula to calculate the break-even point in units is:
\[ \text{Break-even Point (Units)} = \frac{\text{Total Fixed Cost}}{\text{Contribution Margin per Unit}} \]
where:
\[ \text{Contribution Margin per Unit} = \text{Selling Price per Unit} - \text{Variable Cost per Unit} \]

Step 2: Detailed Explanation:
Let us analyze the terms in the formula:
- Fixed Costs: Expenses that remain constant regardless of the level of production, such as rent, salaries, depreciation, and insurance.
- Variable Costs: Expenses that change directly with production volume, such as raw materials, feed, fuel, and packaging.
- Contribution Margin per Unit: The portion of sales revenue from each unit that is available to cover fixed costs and contribute to net profit after variable costs are deducted.
To reach the break-even point, a business must generate enough total contribution margin to equal its total fixed costs.
Therefore, the break-even point is calculated as the ratio of total Fixed Cost to the Contribution Margin per unit.

Step 4: Final Answer:
The break-even point is the ratio of Fixed Cost to the contribution margin per unit, which corresponds to Option (C).