Final answer:
Break-even analysis examines the relationship between fixed costs and variable costs (option A). It determines at what sales volume a company neither profits nor loses money. Fixed costs remain unchanged, while variable costs fluctuate with production levels, both crucial in long-term profitability planning. option (A)
Step-by-step explanation:
Break-even analysis is used to examine the relationship between fixed costs and variable costs (option A) and other factors including volume of sales and price. It is a financial calculation intended to determine the point at which a business neither makes a profit nor incurs a loss, which is when the total revenues are equivalent to the total costs. Within this calculation, understanding fixed and variable costs is crucial, as fixed costs do not change with the quantity of the product that is produced and sold, while variable costs do alter with production volume.
In a short-run perspective, the division of a firm's total costs into these two categories is fundamental. Fixed costs, such as rent or salaries, are considered sunk costs as they cannot be altered in the short term and do not affect the marginal cost of production. Conversely, variable costs, like raw materials and production wages, direct the firm's decisions as they vary with the level of output and display diminishing marginal returns, causing the marginal cost to rise with higher output levels.
Consequently, analyzing these cost structures helps in making informed decisions about production quantities and pricing, contributing to the overall understanding of a firm's profitability in the long run.