A recently graduated business student decided to open a small Internet café serving a variety of unusual nonalcoholic beverages from around the world. He carefully used all the pricing formulas he learned in school and set a goal to break even the first six months and make a moderate profit for the next six months, at which time he would review his pricing strategies. Within a week after opening, every seat was filled and he had to replenish his beverage orders several times. At his six-month review, he was devastated to find that despite huge sales, he had actually lost money. He realized it wasn't his math that was wrong; he forgot to include monthly expenses such as toilet paper, paper towels, and hand soap in his calculations. These costs should have appeared as __________ in his break-even analysis.
A)fixed costs
B)marginal costs
C)variable costs
D)overhead costs
E)sunk costs

Question

Quizplus · Accepted Answer

The costs of toilet paper, paper towels, and hand soap are variable costs because they vary with the volume of sales. In break-even analysis, all variable costs should be taken into account to determine the point at which revenue equals total costs. Fixed costs are expenses that do not vary with the volume of sales, such as rent or salaries. Marginal costs refer to the additional cost incurred by producing one more unit. Overhead costs are a subset of fixed costs that are associated with operating a business, such as utilities or insurance. Sunk costs refer to costs that have already been incurred and cannot be recovered.

A Recently Graduated Business Student Decided to Open a Small