Final answer:
The break-even analysis formula is total fixed costs divided by (selling price minus variable cost per unit), and this calculation finds the point at which profit starts. Average variable cost and marginal cost are other important calculations in understanding unit cost and profit contribution.
Step-by-step explanation:
The correct formula for break-even analysis is: total fixed costs divided by (selling price minus variable cost per unit). This calculation helps a business determine the point at which it will start to make a profit, after covering all its fixed costs.
The selling price minus the variable cost per unit gives us the contribution margin per unit, which is the amount each unit contributes to covering fixed costs. Once the fixed costs are covered, the contribution margin contributes to profit.
In analyzing costs on a per unit basis, average variable cost is calculated by taking the total variable cost and dividing by the total output at each level of output. When a firm's average variable cost is lower than the market price, the firm would be in a position to earn profits, assuming fixed costs are not considered.
Marginal cost is used to assess the cost of producing one additional unit of output. This is calculated by taking the change in total cost and dividing by the change in output. If the marginal cost is lower than the additional revenue from selling another unit, the firm's marginal unit is contributing to profit.