Which of the following variables is not needed to determine the break-even quantity?
A Marginal costs
B Fixed Costs
C Selling Price
D Average Costs
The correct answer and explanation is:
The correct answer is D. Average Costs.
Explanation:
To determine the break-even quantity, which is the number of units a business needs to sell to cover its costs, three key variables are essential: fixed costs, marginal costs, and selling price. These variables help calculate the point at which total revenue equals total costs, meaning no profit or loss.
- Fixed Costs: These are costs that do not change with the level of production or sales. They include things like rent, salaries, or insurance. Fixed costs are essential because they need to be covered no matter how many units are sold.
- Marginal Costs: These are the additional costs incurred by producing one more unit of a product. The marginal cost is important because it represents the cost of producing each unit, and thus, helps in determining the overall cost structure.
- Selling Price: This is the price at which the product is sold to customers. To break even, the revenue from selling the product must cover both fixed and variable costs. Therefore, the selling price is crucial in calculating how much revenue is generated from each unit sold.
Average Costs, on the other hand, are the total costs (fixed plus variable) divided by the number of units produced. While average costs provide an overall cost structure, they are not needed directly in the calculation of break-even quantity. Instead, break-even analysis focuses on the relationship between fixed costs, marginal costs, and the selling price, which determine how many units need to be sold for the business to break even. Average cost is a result of those factors, rather than a necessary input for the calculation.
Thus, average costs are not required to determine the break-even quantity, making D the correct answer.