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Revenue, fixed costs, variable costs and contribution margin

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1. Define revenue, fixed cost, variable cost, and contribution margin.

2. What is meant by the term break-even point? Why are managers of a company interested in the break-even point?

3. "A change in fixed costs" in the second cell under break-even analysis. If fixed costs increase, what happens to the break-even level of output? Why?

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The solution explains various terms and the usefulness of breakeven analysis

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1. Define revenue, fixed cost, variable cost, and contribution margin.

Income from sale of goods or services is called revenue. Fixed costs are those costs which do not change with sales volume. These costs remain fixed when sales volume increase or decrease over a range. If full capacity is achieved, then fixed costs would increase with increase in sales volume. Variable costs are those costs that change in direct proportion to the change in sales volume. Contribution Margin is the difference between the total revenues and total variable costs. The contribution margin goes towards meeting the fixed costs and if it exceeds the fixed costs then the difference is the profits.

2. The break-even point is where the ...

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