Test: Break Even Analysis - UGC NET MCQ

In its narrow sense, break-even analysis specifically refers to a technique used to determine the level of operations at which total revenues equal total expenses, signifying the point where there is neither profit nor loss. This point helps businesses understand their financial standing and aids in making strategic decisions to achieve profitability.

The break-even point in business refers to the level of output where total revenues equal total costs, resulting in no profit or loss. It signifies a point of equilibrium where the company covers all its costs but does not generate any profit. Beyond this point, any additional sales result in profits, whereas falling below this point leads to losses.

The key assumption underlying break-even charts is that the volume of output or production is the only factor which influences the cost. This assumption forms the basis for analyzing the relationship between costs, volume, and profits at various levels of output.

Among the assumptions of break-even analysis, the factor that influences cost is the volume of production. This assumption implies that as the volume of production changes, costs will vary accordingly. Understanding this relationship is crucial for businesses to effectively manage their costs and optimize their operations.

• Assertion is correct as break-even charts indeed do not consider various significant aspects such as capital investment and marketing problems.
• Reason is also correct as it highlights the limited scope of break-even charts.
• However, the Reason does not directly explain why the Assertion holds true, making Option B the correct choice.

• Assertion is correct as the margin of safety indeed serves as a measure of a company's financial stability.
• Reason is also correct since a large margin of safety implies that the business can withstand a significant drop in sales and still remain profitable.
• However, the Reason does not directly explain the Assertion. While both statements are true, a large margin of safety does not inherently mean that the business can remain profitable with a sales decline; it just indicates a buffer before losses occur.

• Assertion is correct as Curvilinear Break-Even Analysis indeed considers varying prices and costs.
• Reason is correct as marginal costing assumes constant prices and costs, which is often not the case practically.
• The Reason explains why the Assertion is true, but it doesn't directly establish a cause-effect relationship.

• The Assertion correctly points out the static nature of break-even charts.
• The Reason also correctly states that this static view can hinder adaptability to changing circumstances.
• Importantly, the Reason logically explains the Assertion, indicating that Option A is the correct choice.

The correct answer is Actual sales - Sales at break-even point.

Key Points

The margin of safety in break-even analysis is the difference between actual sales and sales at the break-even point. It is a measure of how much sales can decline before a company starts to make a loss. A higher margin of safety indicates that a company is more resistant to changes in sales.

The formula for margin of safety is:
Margin of Safety = Actual Sales - Sales at Break-Even Point

Where:
Actual Sales is the total revenue generated by a company over a period of time.
Sales at Break-Even Point is the level of sales that a company needs to cover all of its fixed and variable costs.

The correct answer is Number of units sold

Key Points

• The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small business. In other words, you've reached the level of production at which the costs of production equal the revenues for a product.
• To calculate your company's breakeven point, use the following formula:
• Fixed Costs ÷ (Price - Variable Costs) = Breakeven Point in Units
• The breakeven point (BEP) formula is determined by dividing the total fixed costs associated with production by the contribution per unit, i.e, Sale price per unit minus the variable costs per unit. In this case, fixed costs refer to those that do not change depending upon the number of units sold.