ACCA Performance Management (F5) Certification Practice Exam

What is a fundamental assumption of break-even analysis regarding costs?

1. All costs can be ignored

2. All costs can be divided into fixed and variable elements

3. Only variable costs are considered

4. Fixed costs are variable

The correct answer is: All costs can be divided into fixed and variable elements

A fundamental assumption of break-even analysis is that all costs can be divided into fixed and variable elements. This classification is essential because it allows businesses to understand how costs behave in relation to changes in production levels and sales volume. Fixed costs remain constant regardless of the level of production or sales, making them crucial for determining the break-even point, while variable costs change directly with production levels. By separating these two types of costs, businesses can calculate the break-even point – the level of sales at which total revenues equal total costs, resulting in neither profit nor loss. This analysis is vital for decision-making as it helps in determining pricing strategies, financial projections, and assessing risk. This classification into fixed and variable components provides insight into how to effectively manage costs while making strategic operational decisions. Understanding this structure ultimately supports planning and budgeting processes, as businesses can analyze the impact of different sales scenarios on their profitability.