Q.1 What is the primary purpose of Break-Even Analysis in management accounting?
To calculate total profits for a company
To determine the sales level at which total costs equal total revenue
To estimate annual depreciation
To analyze cash flows
Explanation - Break-Even Analysis helps management identify the point where total revenue equals total costs, meaning no profit or loss is made.
Correct answer is: To determine the sales level at which total costs equal total revenue
Q.2 If fixed costs increase while variable costs and selling price per unit remain constant, what happens to the break-even point?
It decreases
It increases
It remains the same
It becomes zero
Explanation - Higher fixed costs require more units to be sold to cover total costs, thus increasing the break-even point.
Correct answer is: It increases
Q.3 Which formula correctly calculates the break-even point in units?
Fixed Costs / (Selling Price per Unit + Variable Cost per Unit)
Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
(Selling Price per Unit - Variable Cost per Unit) / Fixed Costs
Fixed Costs × (Selling Price per Unit - Variable Cost per Unit)
Explanation - Break-even units = Fixed Costs ÷ Contribution per unit. Contribution per unit = Selling price per unit - Variable cost per unit.
Correct answer is: Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
Q.4 Contribution per unit is defined as:
Selling price per unit - Fixed cost per unit
Selling price per unit - Variable cost per unit
Total revenue - Total cost
Fixed cost per unit + Variable cost per unit
Explanation - Contribution per unit represents the amount each unit contributes towards covering fixed costs and generating profit.
Correct answer is: Selling price per unit - Variable cost per unit
Q.5 Break-even analysis assumes which of the following?
Variable cost per unit changes with production level
Selling price per unit remains constant
Fixed costs vary with production
Profit margin is ignored
Explanation - One of the key assumptions of break-even analysis is that selling price per unit, variable cost per unit, and fixed costs remain constant over the relevant range.
Correct answer is: Selling price per unit remains constant
Q.6 A company has fixed costs of $50,000, selling price per unit of $25, and variable cost per unit of $15. What is the break-even point in units?
2,000 units
5,000 units
1,000 units
3,000 units
Explanation - Break-even units = Fixed Costs / (Selling Price - Variable Cost) = 50,000 / (25-15) = 50,000 / 10 = 5,000 units.
Correct answer is: 5,000 units
Q.7 What is the break-even point in sales value if fixed costs are $60,000 and the contribution margin ratio is 30%?
$180,000
$200,000
$150,000
$120,000
Explanation - Break-even sales = Fixed Costs / Contribution Margin Ratio = 60,000 / 0.3 = 200,000.
Correct answer is: $200,000
Q.8 Contribution Margin Ratio is calculated as:
Variable Cost / Selling Price
Contribution per Unit / Selling Price per Unit
Fixed Cost / Total Sales
Profit / Total Revenue
Explanation - Contribution Margin Ratio indicates what portion of sales contributes towards covering fixed costs and profit. CM Ratio = (Selling Price - Variable Cost) / Selling Price.
Correct answer is: Contribution per Unit / Selling Price per Unit
Q.9 If a firm wants to earn a target profit of $20,000, with fixed costs of $50,000 and contribution per unit of $10, how many units must it sell?
5,000 units
7,000 units
6,000 units
4,000 units
Explanation - Required units = (Fixed Costs + Target Profit) / Contribution per unit = (50,000 + 20,000) / 10 = 70,000 / 10 = 7,000 units.
Correct answer is: 7,000 units
Q.10 Margin of Safety represents:
The excess of sales over break-even sales
The difference between fixed and variable costs
The contribution per unit
The total revenue
Explanation - Margin of Safety indicates the buffer a firm has before it starts incurring losses. It is calculated as Actual Sales - Break-even Sales.
Correct answer is: The excess of sales over break-even sales
Q.11 A company sells a product at $50, variable cost per unit is $30, and fixed costs are $40,000. How much profit will be earned if 3,000 units are sold?
$20,000
$30,000
$10,000
$40,000
Explanation - Profit = (Contribution per unit × Units Sold) - Fixed Costs = (50-30)×3000 - 40,000 = 20×3000 - 40,000 = 60,000 - 40,000 = 20,000.
Correct answer is: $20,000
Q.12 Which of the following is NOT an assumption of break-even analysis?
Costs can be classified into fixed and variable
Selling price per unit remains constant
All units produced are sold
Total fixed costs change with production
Explanation - Break-even analysis assumes that fixed costs remain constant regardless of the production level.
Correct answer is: Total fixed costs change with production
Q.13 If the contribution margin ratio increases while fixed costs remain constant, the break-even point:
Increases
Decreases
Remains the same
Cannot be determined
Explanation - Higher contribution per unit means fewer units are needed to cover fixed costs, thus reducing the break-even point.
Correct answer is: Decreases
Q.14 Break-even analysis is useful for:
Financial reporting to shareholders
Short-term decision making and profit planning
Preparing cash flow statements
Auditing
Explanation - Break-even analysis helps management decide on sales targets, pricing, and cost control to achieve profits.
Correct answer is: Short-term decision making and profit planning
Q.15 Which factor does NOT affect the break-even point?
Fixed Costs
Variable Costs
Selling Price per Unit
Net Profit of previous year
Explanation - Break-even depends on costs and selling price, not past profits.
Correct answer is: Net Profit of previous year
Q.16 A firm has fixed costs of $120,000, selling price per unit of $60, and variable cost per unit of $40. Break-even point in units is:
3,000 units
2,000 units
6,000 units
4,000 units
Explanation - Break-even units = 120,000 / (60-40) = 120,000 / 20 = 6,000 units.
Correct answer is: 6,000 units
Q.17 If sales increase above the break-even point, the margin of safety:
Decreases
Increases
Remains zero
Becomes negative
Explanation - Margin of safety represents how much sales can fall before losses occur. More sales above break-even increases this margin.
Correct answer is: Increases
Q.18 In break-even analysis, total contribution equals fixed costs at:
Target profit point
Break-even point
Maximum sales point
Minimum production level
Explanation - At break-even, total contribution (sales - variable costs) exactly equals total fixed costs, resulting in zero profit.
Correct answer is: Break-even point
Q.19 If variable costs increase while fixed costs and selling price remain constant, the break-even point:
Decreases
Increases
Remains the same
Becomes zero
Explanation - Higher variable costs reduce contribution per unit, requiring more units to cover fixed costs.
Correct answer is: Increases
Q.20 Break-even chart helps visualize:
Profit and loss across different levels of production
Annual depreciation schedule
Cash inflow and outflow
Inventory valuation
Explanation - Break-even charts plot total costs and revenue to show at which point profit begins and loss ends.
Correct answer is: Profit and loss across different levels of production
Q.21 A firm’s contribution per unit is $15, fixed costs are $45,000. Break-even point in units is:
3,000 units
2,500 units
4,000 units
5,000 units
Explanation - Break-even units = Fixed Costs / Contribution per unit = 45,000 / 15 = 3,000 units.
Correct answer is: 3,000 units
Q.22 A firm has a margin of safety of 25% on sales of $200,000. Break-even sales are:
$150,000
$100,000
$125,000
$175,000
Explanation - Break-even sales = Actual Sales × (1 - Margin of Safety) = 200,000 × (1-0.25) = 200,000 × 0.75 = 150,000.
Correct answer is: $150,000
Q.23 Which of the following statements about break-even point is correct?
Profit is zero at break-even point
Loss is maximum at break-even point
Fixed costs are zero at break-even point
Contribution margin is zero at break-even point
Explanation - Break-even is the point where total revenue equals total costs, resulting in zero profit.
Correct answer is: Profit is zero at break-even point
Q.24 If both selling price and variable cost per unit increase proportionally, the break-even point:
Increases
Decreases
Remains unchanged
Cannot be determined
Explanation - If contribution per unit (selling price - variable cost) remains the same, the break-even point does not change.
Correct answer is: Remains unchanged