What is break-even analysis?

• A. A measure of how much profit can be earned after a certain sales level.
• B. The point where total revenue equals total costs; break-even volume = fixed costs / (price - variable cost per unit).
• C. A method to maximize short-term cash flow.
• D. A technique to determine optimal inventory levels.

Answer: (B)

Break-even analysis finds the sales level at which revenues exactly cover all costs, leaving zero profit. It separates costs into fixed costs (unchanged by output) and variable costs (change with each unit produced). At the break-even point, total revenue equals total costs, so profit is zero. The key calculation uses the contribution margin per unit (selling price minus variable cost per unit) and is expressed as break-even volume = fixed costs / (price per unit − variable cost per unit). This shows how many units must be sold to start making a profit and helps you evaluate pricing, cost structure, and sales targets. For example, with fixed costs of 1,000, a price of 10, and a variable cost of 6, the contribution margin is 4, so break-even volume is 1,000 / 4 = 250 units. At 250 units, revenue and total costs are both 2,500, so profit is zero; selling more than 250 units yields a profit. This concept is different from aiming to maximize short-term cash flow or determining optimal inventory levels, and it’s precisely describing the point where revenues cover costs and how to calculate the required volume.