How do you call the method of telling when the economic value of one alternative becomes equal to the economic value of another alternative? A. cost-benefit analysis. B. break-even analysis. C. cost accounting. D. accelerated depreciation.
Answer (1)
The method of telling when the economic value of one alternative becomes equal to the economic value of another alternative is called Break-even analysis . Therefore, the correct answer is B. break-even analysis.
Break-even analysis is a fundamental financial calculation used by businesses to determine at what point their revenues will equal their costs, meaning they will neither make a profit nor incur a loss. This point is known as the break-even point.
Here's a step-by-step explanation of the break-even analysis:
Identify Costs : Costs are divided into two categories: fixed costs and variable costs.
Fixed Costs : These are costs that do not change with the level of production or sales, such as rent or salaries.
Variable Costs : These are costs that vary directly with the level of production, like materials and labor directly involved in production.
Determine the Selling Price : This is the price at which the product is sold to customers.
Calculate Contribution Margin : The contribution margin per unit is calculated by subtracting the variable cost per unit from the selling price per unit.
Contribution Margin = Selling Price − Variable Cost
Compute Break-even Point : The break-even point in units is calculated by dividing the total fixed costs by the contribution margin per unit.
Break-even Point (units) = Contribution Margin per Unit Total Fixed Costs
At the break-even point, the company's total revenues are equal to the total costs (fixed costs plus variable costs), and the company does not realize any profit or loss.
Break-even analysis is a crucial tool for managers and decision-makers. It helps them understand the minimum performance necessary to avoid losses and is often used in budgeting, planning, and risk assessment. It is especially important when deciding between different business scenarios or strategies.
