Linear Assumptions in Break-Even Charts

Steps:

• Recall break-even chart basics: plots total costs (fixed + variable) against revenue over activity levels.
• Identify key assumption: costs and revenues behave linearly for simplicity.
• Evaluate options: check each against standard definitions of break-even analysis.
• Confirm correct choice by matching to core principles.

Why C is correct:

• Break-even charts assume linear relationships, where fixed costs are constant, variable costs rise proportionally with output, and revenue increases linearly with sales volume, enabling straightforward intersection at break-even point.

Why the others are wrong:

• A: At break-even, total revenue equals total costs (fixed + variable), not just fixed costs.
• B: Break-even charts allow identifying optimal activity levels by showing profit zones beyond break-even.
• D: Margin of safety measures sales excess over break-even sales, not revenue over fixed costs alone.

Final answer: C