What is the break-even point and how is it calculated in a simple cost-volume-profit model?

• A. Break-even is the sales level where revenues exceed costs; units = fixed costs / contribution margin per unit.
• B. Break-even occurs when total revenues equal total costs; units to break-even = fixed costs / contribution margin per unit.
• C. Break-even is when cash flow is positive; units = working capital / unit margin.
• D. Break-even is when revenue equals variable costs; units = variable costs / price.

Answer: (B)

In a simple cost-volume-profit model, the break-even point is the level of sales where the business covers all its costs, leaving zero profit or loss. This happens when total revenues equal total costs. The calculation uses fixed costs divided by the contribution margin per unit, where contribution margin per unit is the price per unit minus the variable cost per unit. So the break-even quantity is fixed costs divided by (price minus variable cost). This makes sense because each unit sold adds its contribution to fixed costs; once fixed costs are covered, profit begins. The other options miss the break-even idea: one describes a profitable level (revenues exceed costs), another brings in cash flow and working capital not part of the basic CVP break-even, and the last ignores fixed costs entirely by equating revenue to variable costs.