Final answer:
The break-even point is where a business's total costs equal its total revenue. Fixed costs remain constant regardless of production, while variable costs change with production levels. A business may continue operating at a loss or shut down when operating below the break-even point, based on the option that minimizes losses.
Step-by-step explanation:
Understanding how the break-even point reacts to changes in fixed and variable costs is essential in business for decision-making. At the break-even point, total revenue equals total costs, meaning the business is not making a profit but is not losing money either. When prices fall below this point, businesses operate at a loss.
Fixed costs are expenses that do not change with the level of production, such as rent or salaries. These are shown as the vertical intercept on a cost graph because they are incurred even when the output is zero. On the other hand, variable costs fluctuate with production levels, including raw materials and labor directly involved in manufacturing.
When production is zero, only fixed costs of $160 are present. As production scales up, variable costs are added to fixed costs, increasing the total cost. The price must exceed the firm's average variable cost to justify remaining operational. If a business's operations fall below the break-even point, where price equals average cost, it may choose to continue producing (operating at a loss) or shut down. The preferred option is the one that minimizes losses.
To calculate average profit, total profit is divided by the number of units sold. This helps evaluate patterns of costs to determine potential profit. An analysis of costs in the short-run includes examining total cost, fixed cost, variable cost, marginal cost, and average cost, considering every factor of production has a corresponding factor price.