The correct answer is: A. a-4, b-1, c-2, d-3
- a. Excess of actual sales over the break-even sales volume (4) is the margin of safety. It is the amount by which actual sales exceed the break-even sales volume. It is a measure of the risk associated with a business.
- b. Sum of fixed cost and profit (1) is the contribution. It is the amount of revenue that is available to cover variable costs and contribute to profit.
- c. Break-even chart (2) is a graphical representation of the cost, revenue, and profit of a business. It can be used to identify the break-even point and to analyze the impact of changes in costs, prices, and volume on profit.
- d. Break-even point (3) is the point at which a business’s revenue equals its costs. It is the point at which a business neither makes a profit nor incurs a loss.
Here is a more detailed explanation of each option:
- a. Excess of actual sales over the break-even sales volume (4) is the margin of safety. It is the amount by which actual sales exceed the break-even sales volume. It is a measure of the risk associated with a business. The margin of safety is calculated as follows:
Margin of safety = Actual sales – Break-even sales
For example, if a business has actual sales of $100,000 and a break-even sales volume of $80,000, then the margin of safety is $20,000. This means that the business has $20,000 in sales that it can lose before it starts to incur a loss.
- b. Sum of fixed cost and profit (1) is the contribution. It is the amount of revenue that is available to cover variable costs and contribute to profit. The contribution is calculated as follows:
Contribution = Selling price per unit – Variable cost per unit
For example, if a business sells a product for $10 per unit and has a variable cost of $6 per unit, then the contribution is $4 per unit. This means that for every unit that the business sells, it has $4 available to cover fixed costs and contribute to profit.
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c. Break-even chart (2) is a graphical representation of the cost, revenue, and profit of a business. It can be used to identify the break-even point and to analyze the impact of changes in costs, prices, and volume on profit. A break-even chart is typically created by plotting the following on a graph:
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Total costs
- Variable costs
- Fixed costs
- Revenue
- Profit
The break-even point is the point at which the total costs line intersects the revenue line. The break-even point can be calculated algebraically as follows:
Break-even point = Fixed costs / Contribution per unit
For example, if a business has fixed costs of $10,000 and a contribution per unit of $4, then the break-even point is 2,500 units. This means that the business must sell 2,500 units before it starts to make a profit.
- d. Break-even point (3) is the point at which a business’s revenue equals its costs. It is the point at which a business neither makes a profit nor incurs a loss. The break-even point can be calculated algebraically as follows:
Break-even point = Fixed costs / Contribution per unit
For example, if a business has fixed costs of $10,000 and a contribution per unit of $4, then the break-even point is 2,500 units. This means that the business must sell 2,500 units before it starts to make a profit.