Components of break-even analysis: Which elements are included in a standard cost–volume–profit study?
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AFixed expenses
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BVariable cost
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CSales revenue
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DAll of these
Answer
Correct Answer: All of these
Explanation
Introduction / Context:Break-even (CVP) analysis quantifies how profits respond to changes in volume by modeling revenue and costs. Understanding the inputs ensures accurate computation of BEP and margin of safety.
Given Data / Assumptions:
- Fixed expenses do not vary with volume within the relevant range.
- Variable cost changes directly with units produced/sold.
- Sales revenue is price per unit times quantity.
Concept / Approach:Profit = Sales revenue - Total cost, and Total cost = Fixed expenses + Variable cost. CVP analysis requires all three components to derive BEP, contribution margin, and profit targets.
Step-by-Step Solution:
Express total cost as fixed + variable.Compute contribution margin per unit = Price - Variable cost per unit.Calculate BEP units = Fixed expenses / Contribution margin per unit.Relate profit targets to the same three components.Verification / Alternative check:Graphical CVP shows fixed cost, total cost, and revenue lines; the intersection defines BEP, confirming the role of all three.
Why Other Options Are Wrong:Picking any single element ignores the integrated nature of CVP; you need all components to compute BEP.
Common Pitfalls:Forgetting to separate semi-variable costs into fixed and variable parts; using list price instead of realized net price.
Final Answer:All of these