What does break-even analysis determine?

What does break-even analysis determine?

• A. How much needs to be sold to cover costs
• B. Profit margin
• C. Market share
• D. Customer demand

Answer: (A)

Break-even analysis tells you how many units you must sell to cover all costs. It shows the sales level at which total revenue equals total costs, so profit is zero. This relies on fixed costs—those that don’t change with output—and variable costs per unit, with the key idea being the contribution per unit (selling price minus variable cost per unit). Break-even point in units = fixed costs divided by contribution per unit. If sales are below this point, the business would lose money; above it, it starts to make a profit. So this is about determining the minimum sales needed to cover costs, not about profit margins, market share, or customer demand.

Break-even analysis tells you how many units you must sell to cover all costs. It shows the sales level at which total revenue equals total costs, so profit is zero. This relies on fixed costs—those that don’t change with output—and variable costs per unit, with the key idea being the contribution per unit (selling price minus variable cost per unit). Break-even point in units = fixed costs divided by contribution per unit. If sales are below this point, the business would lose money; above it, it starts to make a profit. So this is about determining the minimum sales needed to cover costs, not about profit margins, market share, or customer demand.