In CVP, fixed costs are which of the following?

In CVP, fixed costs are which of the following?

• A. Equal to total revenue
• B. Irrelevant to breakeven
• C. Equal to total variable costs
• D. Covered by contribution to reach breakeven

Answer: (B)

In CVP analysis, fixed costs are the costs that don’t change with the level of production or sales. The breakeven point is reached when the total contribution from sales exactly covers these fixed costs. Contribution per unit is the amount each unit adds to cover fixed costs (selling price minus variable cost per unit). When total contribution equals fixed costs, profit is zero; producing more than that yields a profit, producing less yields a loss. So fixed costs are not equal to revenue, nor to variable costs, and they are not irrelevant to breakeven. They are the amount that must be covered by contribution to reach the breakeven level. For example, if the price is 100 and variable cost is 60, the contribution per unit is 40. If fixed costs total 1,000, you’d need 1,000 / 40 = 25 units to break even; at that point, total contribution covers fixed costs.

In CVP analysis, fixed costs are the costs that don’t change with the level of production or sales. The breakeven point is reached when the total contribution from sales exactly covers these fixed costs. Contribution per unit is the amount each unit adds to cover fixed costs (selling price minus variable cost per unit). When total contribution equals fixed costs, profit is zero; producing more than that yields a profit, producing less yields a loss. So fixed costs are not equal to revenue, nor to variable costs, and they are not irrelevant to breakeven. They are the amount that must be covered by contribution to reach the breakeven level. For example, if the price is 100 and variable cost is 60, the contribution per unit is 40. If fixed costs total 1,000, you’d need 1,000 / 40 = 25 units to break even; at that point, total contribution covers fixed costs.