Question

The breakeven point is defined as the level of production at which

a. fixed costs are covered by revenue
b. variable costs are covered by revenue
c. total revenue is sufficient to cover total costs
d. marginal revenue equals marginal costs
e. the law of diminishing returns is activated

Answer 1

The breakeven point is defined as total revenue is sufficient to cover total costs.Thus the option c. total revenue is sufficient to cover total costs is correct.

Step-by-step explanation:

The breakeven point is the level of production at which total revenue equals total costs. In other words, at the breakeven point, a business neither makes a profit nor incurs a loss. This is achieved when the total revenue from sales exactly covers both the fixed costs and the variable costs associated with production. Mathematically, the breakeven point can be calculated using the formula:

Breakeven Point=Fixed coast /Selling Price per Unit−Variable Cost per Unit

Fixed costs are the expenses that do not vary with the level of production, while variable costs change proportionally with the production quantity. The breakeven point occurs when the total revenue (the product of the selling price per unit and the quantity sold) equals the sum of fixed costs and variable costs.

Understanding the breakeven point is crucial for businesses to assess their financial viability and set pricing strategies. It signifies the minimum level of sales needed to avoid losses. By surpassing the breakeven point, a business starts generating profits. Conversely, falling below this point results in losses. Thus, the breakeven analysis is a fundamental tool in managerial decision-making, providing insights into the relationship between costs, revenue, and profit at different levels of production.

Thus the option c. total revenue is sufficient to cover total costs is correct.