Question

What are the four costs? How do the costs relate to one another? How are they used to calculate the break-even point?

Answer 1

SOLUTION:

The four costs are as follows:

(1). Fixed Costs: The sum of all costs required to produce the first unit of a product. This amount does not vary as production increases or decreases, until new capital expenditures are needed.

(2).Variable Unit Cost: Costs that vary directly with the production of one additional unit.

(3). Total Cost: The sum of the fixed cost and total variable cost for any given level of production, i.e., fixed cost plus total variable cost.

i.e. Total Cost=Fixed Cost+Variable Cost

(4). Total Revenue: The product of forecasted unit sales and unit price, i.e., forecasted unit sales times unit price.

The graphic method of analysis (below) helps you in understanding the concept of the break-even point. However, the break-even point is found faster and more accurately with the following formula:

Q = F_C / (U_P - V_C)

where:

Q = Break-even Point, i.e., Units of production (Q),

F_C = Fixed Costs,

V_C = Variable Costs per Unit

U_P = Unit Price

Therefore,

Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)