Term
Fixed Costs
What are fixed costs?
Answer
Definition
Expenses that do not change with output level, e.g., rent and salaries.
In business, understanding costs and revenues is fundamental to evaluating performance.
Break-even calculations rely on these key terms to assess profitability and risk.
Break-even analysis supports many practical business decisions:
What are fixed costs?
Expenses that do not change with output level, e.g., rent and salaries.
What are variable costs?
Costs that vary directly with production, like raw materials.
How is total cost calculated?
Total cost = Fixed costs + Variable costs.
What is unit cost?
Cost per unit produced; total cost divided by units made.
How do you calculate total sales revenue?
Total revenue = Price per unit × Quantity sold.
What is break-even point?
The sales volume where total revenue equals total costs; no profit or loss.
Define break-even quantity.
Number of units needed to be sold to break even.
What is contribution per unit?
Sales price per unit minus variable cost per unit.
How to calculate break-even quantity?
Break-even quantity = Fixed costs ÷ Contribution per unit.
What is margin of safety?
The amount sales can fall before the business incurs a loss.
Why is break-even analysis important?
Helps evaluate minimum sales needed to cover costs and supports business decisions.
What decisions are supported by break-even analysis?
Special order acceptance, product discontinuation, price setting, ‘what-if’ scenarios.