The Correct Answer and Explanation is:
The correct answer is C. The point where the cost and revenue are equal.
Explanation
This question asks for the definition of a specific point in a business or economic context, represented by an ordered pair like (64, 200000). This point is known as the break-even point, a fundamental concept in financial analysis. The break-even point is the level of production at which a company’s total revenues are exactly equal to its total costs.
To understand why option C is correct, let’s define the terms involved.
- Total Cost: This is the complete cost of production and operation. It is composed of two main components: fixed costs and variable costs. Fixed costs, often called overhead, are expenses that do not change regardless of the production level, such as rent, insurance, and salaries. Variable costs are expenses that fluctuate directly with the number of units produced, such as raw materials and direct labor. The total cost is the sum of these two: Total Cost = Fixed Costs + Variable Costs.
- Total Revenue: This is the total amount of income generated from selling a product. It is calculated by multiplying the price per unit by the number of units sold. Total Revenue = Price per Unit × Number of Units Sold.
The break-even point occurs where Total Cost equals Total Revenue. At this specific point, the company is neither making a profit nor incurring a loss. It has earned just enough money to cover all of its expenses. For the given ordered pair (64, 200000), this means that when the company produces and sells 64 units, its total cost is $200,000, and its total revenue is also $200,000.
The other options are incorrect because they only consider parts of the total cost.
- Option A is incorrect because it equates revenue only with overhead (fixed) costs, ignoring the variable costs of production.
- Option B is incorrect because it equates revenue with production (variable) costs, ignoring the fixed overhead costs.
- Option D is incorrect because it compares total cost with just overhead cost, which is only a component of the total cost.
Therefore, the only accurate and complete description of the break-even point is the point where total cost and total revenue are equal. This milestone is crucial for any business, as it indicates the minimum level of sales needed to avoid a loss. Any sales beyond this point contribute to profit.
