ACCA Performance Management (F5) Certification Practice Exam

What happens to total fixed costs in break-even analysis?

1. They increase with production

2. They remain constant

3. They vary with sales

4. They are irrelevant

The correct answer is: They remain constant

Total fixed costs remain constant in break-even analysis. This concept is fundamental in cost accounting, as fixed costs do not change with the level of production or sales within a relevant range. Fixed costs include expenses such as rent, salaries, and insurance that do not fluctuate with the number of goods produced or sold. Understanding that these costs remain unchanged allows businesses to determine the break-even point, which is the level of sales at which total revenues equal total costs. This analysis helps in making pricing and production decisions, as it clarifies how many units must be sold to cover all costs before generating profit. When analyzing the other options, it is clear that they do not accurately reflect the nature of fixed costs in break-even contexts. For instance, if fixed costs were to increase with production, it would imply they are variable, which contradicts the definition of fixed costs. Similarly, stating that fixed costs vary with sales misrepresents their nature, as these costs remain constant regardless of sales volume. Lastly, deeming fixed costs as irrelevant would undermine their significance in financial decision-making and cost analysis, particularly when assessing profitability and cost management strategies.