5.4 Break-even

• The break-even point is the level of sales volume or revenue where a business's total revenue equals its total costs
• Total costs are the sum of fixed costs and variable costs
• Variable costs decrease as output increases.

  False
• The break-even point is where a business starts making a profit.

  False
• The break-even point is calculated in monetary terms (e.g., dollars).

  False
• Fixed costs change directly with the level of output.

  False
• Match the cost type with its definition:

  Fixed Costs ↔️ Costs that do not change with output

  Variable Costs ↔️ Costs that change with output

  Total Costs ↔️ Sum of fixed and variable costs
• The break-even point occurs when total revenue equals total costs
• Steps to derive the break-even formula

  1️⃣ Total Revenue = Total Fixed Costs + Total Variable Costs

  2️⃣ (Selling Price per Unit x Units Sold) = Total Fixed Costs + (Variable Cost per Unit x Units Sold)

  3️⃣ Units Sold = Total Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
• Match the component of the break-even formula with its definition:

  Total Fixed Costs ↔️ Costs that do not change with output

  Selling Price per Unit ↔️ The price at which each unit is sold

  Variable Cost per Unit ↔️ Costs that increase with production
• Variable costs increase with production volume
• Total fixed costs are costs that do not change with production volume
• At the break-even point, a business makes neither a profit nor a loss.

  True
• What is the minimum level of sales needed to cover all costs?

  Break-even point
• What equation represents the condition at break-even?

  Total Revenue = Total Costs
• The break-even formula is: Total Fixed Costs / (Selling Price per Unit - Variable Cost per Unit
• What does a break-even graph plot?

  Total revenue and costs
• Why is knowing the break-even point important for businesses?

  Indicates minimum sales for profit
• What is the break-even point in business terms?

  Total revenue equals total costs
• What are variable costs in a business?

  Costs that change with output
• What are examples of fixed costs?

  Rent, insurance, salaries
• What income is generated from sales called?

  Revenue
• The break-even point for a company with total fixed costs of $50,000, a selling price per unit of $25, and a variable cost per unit of $10 is approximately 3334 units.
• What is the break-even formula?

  Units = Fixed Costs / (Price - Variable Costs)
• What is the purpose of the break-even formula?

  Calculate units to cover costs
• What type of cost increases with production volume?

  Variable cost
• What are the total fixed costs in the example provided?

  $50,000 < answer_{e}nd > < distractors >$25,000 ||| $75,000 ||| $100,000 < / distractors > < qa_{e}nd > < qa_{s}tart > < line > 72 < / line > < question_{s}tart > What is the selling price per unit \in the example? < question_{e}nd > < answer_{s}tart >$25
• Revenue is the total income generated from sales
• A company must sell approximately 3,334 units to break even in the example provided.

  True
• Match the component of the break-even formula with its definition:

  Total Fixed Costs ↔️ Costs that do not change with production

  Selling Price per Unit ↔️ Price at which each unit is sold

  Variable Cost per Unit ↔️ Costs that increase with production volume
• The break-even point on a graph is where total revenue equals total costs
• Match the significance of the break-even point with its explanation:

  Profitability ↔️ Minimum sales needed for profit

  Risk Management ↔️ Avoidance of losses

  Decision-Making ↔️ Guidance for strategic choices
• To calculate the break-even point, you first identify the total fixed costs, selling price per unit, and variable cost per unit.
• The break-even formula calculates the number of units a business needs to sell to make a profit.

  False
• Steps to calculate the break-even point

  1️⃣ Identify fixed costs, selling price, and variable costs

  2️⃣ Plug values into the formula

  3️⃣ Solve for the number of units
• The break-even point in the example is approximately 3,334 units
• Match the cost type with its definition:

  Fixed Costs ↔️ Costs that do not change with output

  Variable Costs ↔️ Costs that change with output

  Total Costs ↔️ Sum of fixed and variable costs
• What is the numerator in the break-even formula?

  Total fixed costs
• What is the break-even formula used to calculate?

  Units needed to cover costs
• The first step in calculating the break-even point is to identify fixed costs, selling price, and variable cost per unit

  True