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Business Strategy and Accounting Basics

A company has sales of ¥50 million, variable costs of ¥20 million and fixed costs of ¥24 million. Which is its break-even sales?

  1. A¥40 million
  2. B¥44 million
  3. C¥60 million
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Answer: A. ¥40 million

The variable cost ratio is 20 ÷ 50 = 0.4, so the contribution margin ratio, the part of sales available to cover fixed costs, is 1 − 0.4 = 0.6. Break-even sales are the sales at which the contribution margin exactly covers the fixed costs, so 24 ÷ 0.6 = ¥40 million. The current sales of ¥50 million are above the break-even point, and the profit is 50 − 20 − 24 = ¥6 million.

  • A. Correct. It is fixed costs ÷ contribution margin ratio = 24 ÷ 0.6.
  • B. This is the sum of variable and fixed costs (the total cost at the current sales). When sales change, variable costs change too, so this is not the break-even point.
  • C. This divides the fixed costs by the variable cost ratio (0.4). The divisor should be the contribution margin ratio, 1 minus the variable cost ratio.
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