Caterpillar wants to lower production costs in order to decrease its required break even volume. Which formula should they use for the break-even calculation?
A) fixed costs/(variable costs - price)
B) fixed costs/(price - variable costs)
C) fixed costs × (variable costs - price)
D) (price - variable costs)/fixed costs
E) fixed costs/unit sales

Question

Quizplus · Accepted Answer

In order to lower the required break-even volume, Caterpillar needs to decrease its fixed costs and/or increase the selling price or decrease the variable costs. The formula for break-even calculation is fixed costs divided by the difference between the selling price and variable costs. By using this formula, Caterpillar can determine the selling price or the variable costs needed to reach a desired break-even volume. Using option B will help the company to determine the break-even volume by taking into account the fixed costs and the difference between the selling price and variable costs.

Caterpillar Wants to Lower Production Costs in Order to Decrease