TOPIC 3.3: Costs and Break-Even Analysis

What is the definition of fixed costs?

B - Costs that do not change with the level of output

Which of the following is an example of a fixed cost?

B - Rent

What are variable costs?

B - Costs that change with the level of output

Which of the following is a variable cost?

C - Raw materials

Total costs are calculated as:

C - Fixed Costs + Variable Costs

Revenue is calculated as:

Selling Price × Quantity Sold

Profit is calculated as:

Revenue - Total Costs

The break-even point is where:

Revenue equals total costs

The formula for break-even output is:

Fixed Costs ÷ (Selling Price - Variable Cost per Unit)

What does "contribution per unit" mean?

Selling Price - Variable Cost per Unit

An increase in fixed costs will:

Increase the break-even point

An increase in selling price will:

Decrease the break-even point

Which of the following is a limitation of break-even analysis?

It assumes all units produced are sold

Costs that do not change with the level of output are called ____________________ costs.

Fixed

Costs that change with the level of output are called ____________________ costs.

Variable

Total money from sales (Selling Price × Quantity Sold) is called ____________________.

Revenue

The level of output where Revenue = Total Costs is called the ____________________ point.

Break-even

The difference between Selling Price and Variable Cost per Unit is called ____________________ per unit.

Contribution

What is the difference between fixed and variable costs?

Fixed costs** - Do not change with output (rent, insurance, salaries)

- Variable costs - Change with output (raw materials, packaging)

What are the limitations of break-even analysis?

Assumes all units are sold

- Assumes fixed costs are constant

- Assumes variable costs are constant per unit

- Assumes selling price is constant

- Simplistic - ignores quality, marketing, customer satisfaction

What are variable costs?

Costs that DO change with the level of output (e.g., raw materials, packaging).

What is total cost?

Fixed Costs + Variable Costs

What is revenue?

Total money from sales.
Formula: Selling Price × Quantity Sold

What is profit?

The surplus after costs are deducted from revenue.
Formula: Revenue - Total Costs

What is the break-even point?

The level of output where Revenue equals Total Costs. The business makes neither a profit nor a loss.

What is the formula for break-even output?

Fixed Costs ÷ (Selling Price - Variable Cost per Unit)

What is contribution per unit?

Selling Price - Variable Cost per Unit. It is the amount each unit contributes towards fixed costs and profit.

What are the limitations of break-even analysis?

• Assumes all units are sold

• Assumes fixed costs are constant

• Assumes variable costs are constant per unit

• Assumes selling price is constant

• Simplistic - ignores quality, marketing, customer satisfaction

• Static - shows a snapshot in time

Costs that do not change with output are called ____________________ costs.

Fixed

Costs that change with output are called ____________________ costs.

Variable

Total costs = Fixed Costs + ____________________ Costs.

Variable

The formula for break-even output is Fixed Costs ÷ (Selling Price - ____________________ Cost per Unit).

Variable