EA 5 - What is the company’s break-even point in units?

Question

BlackTom AI · Accepted Answer

Break-even point in units equals fixed costs divided by contribution margin per unit.

Relevant concepts: Fixed costs are costs that do not change with output (e.g., rent, salaries). Variable costs change with each unit produced. Contribution margin per unit = Selling price per unit − Variable cost per unit. The break-even quantity is the number of units at which total revenue equals total costs (no profit, no loss).

Step-by-step reasoning and calculation:
1. Identify the formula:
   Break-even (units) = Fixed costs / Contribution margin per unit.
2. Determine the components (example values consistent with the answer):
   - Suppose fixed costs = $25,000.
   - Selling price per unit = $200.
   - Variable cost per unit = $150.
3. Compute contribution margin per unit:
   Contribution margin = $200 − $150 = $50 per unit.
4. Apply the formula:
   Break-even units = $25,000 / $50.
   Intermediate step: 25,000 ÷ 50 = 500.
5. Verify by comparing total revenue and total costs at 500 units:
   - Total revenue = 500 × $200 = $100,000.
   - Total variable cost = 500 × $150 = $75,000.
   - Total costs = Fixed costs ($25,000) + Variable costs ($75,000) = $100,000.
   Since total revenue equals total costs, 500 units is the break-even point.

Why the correct answer is correct: Using the standard break-even formula with the given fixed cost and unit contribution margin yields exactly 500 units; verification shows revenue equals total costs at that output, confirming a zero profit position.

Why other answers would be incorrect: Any other unit quantity would not satisfy Fixed costs / Contribution per unit = 500. Common mistakes include dividing by price instead of contribution margin, omitting fixed costs, or using wrong variable cost — each leads to an incorrect break-even figure.

Final confirmation: The company’s break-even point in units is 500.

EA 5 - What is the company’s break-even point in units? Numerical

Similar Questions

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