Question

Consider the concepts of break-even and profit-loss analysis. Define fixed and variable costs. Now provide real-life examples as to each of the costs

Answer 1

Break-even point is the point at which number of sales earn enough profit to offset all the costs incurred.

Profit and loss analysis is a report about all the costs ,revenues and the profit or loss resulting from it.

Fixed costs are the costs that are incurred to acquire assets like equipment ,machinery ,factories etc. These costs are fixed ,meaning they do not change with the change in the number of units produced.

Variable costs vary with the number of units produced as these costs are incurred for every unit produced.

For example : acquiring a manufacturing facility, equipment etc are fixed costs. No matter if you produce 1 unit or 1,000 ,the cost is already incurred and remains the same. You hire workers and raw materials are acquired for the production ,each unit produced will require some raw material and labor. Increase in number of units produced will increase the variable costs with each unit.