Break-even analysis determines the minimum number of units to sell to avoid a loss. True or false?

Break-even analysis determines the minimum number of units to sell to avoid a loss. True or false?

• A. True
• B. False
• C. It determines maximum price to charge
• D. It ignores fixed costs

Answer: (A)

Break-even analysis answers the question of when revenue first covers all costs. The break-even point is the quantity of units sold where total revenue equals total costs, so profit is zero. That is the minimum you must sell to avoid a loss. This analysis relies on fixed costs (which don’t change with output) and variable costs per unit; the contribution margin per unit (price minus variable cost) times the number of units equals fixed costs at break-even. So selling fewer units means a loss, selling more means profit. The idea of determining a maximum price to charge isn’t what break-even does, and fixed costs aren’t ignored—they’re essential to finding the break-even quantity.

Break-even analysis answers the question of when revenue first covers all costs. The break-even point is the quantity of units sold where total revenue equals total costs, so profit is zero. That is the minimum you must sell to avoid a loss. This analysis relies on fixed costs (which don’t change with output) and variable costs per unit; the contribution margin per unit (price minus variable cost) times the number of units equals fixed costs at break-even. So selling fewer units means a loss, selling more means profit. The idea of determining a maximum price to charge isn’t what break-even does, and fixed costs aren’t ignored—they’re essential to finding the break-even quantity.