Which statement best describes breakeven analysis?

Which statement best describes breakeven analysis?

• A. It analyses only fixed costs at different outputs.
• B. It analyses only profits at various prices.
• C. It analyses the relationships between activity levels, costs and profits.
• D. It ignores variable costs when forecasting.

Answer: (C)

Breakeven analysis looks at how the level of activity (output) affects costs, revenues and thus profits. It shows the point where total revenue just covers total costs, and it explains how profits change as output moves above or below that point. The best description is that it analyzes the relationships between activity levels, costs and profits because it combines fixed costs, variable costs that vary with volume, and the revenue earned from selling goods or services. Remember that fixed costs stay the same regardless of output, while variable costs rise with volume, so the contribution per unit (price minus variable cost) drives how quickly profits grow after reaching break-even. For example, with fixed costs of 10, a variable cost per unit of 2, and a price of 5, the contribution per unit is 3, so break-even is 10/3 ≈ 4 units. At 5 units, profit is 5 × 5 minus total costs (10 fixed plus 5 × 2 variable) equals 25 minus 20, i.e., 5. The other options miss how revenue, costs and output interact, by focusing only on fixed costs, or only on profits at different prices, or by ignoring variable costs.

Breakeven analysis looks at how the level of activity (output) affects costs, revenues and thus profits. It shows the point where total revenue just covers total costs, and it explains how profits change as output moves above or below that point. The best description is that it analyzes the relationships between activity levels, costs and profits because it combines fixed costs, variable costs that vary with volume, and the revenue earned from selling goods or services.

Remember that fixed costs stay the same regardless of output, while variable costs rise with volume, so the contribution per unit (price minus variable cost) drives how quickly profits grow after reaching break-even. For example, with fixed costs of 10, a variable cost per unit of 2, and a price of 5, the contribution per unit is 3, so break-even is 10/3 ≈ 4 units. At 5 units, profit is 5 × 5 minus total costs (10 fixed plus 5 × 2 variable) equals 25 minus 20, i.e., 5.

The other options miss how revenue, costs and output interact, by focusing only on fixed costs, or only on profits at different prices, or by ignoring variable costs.