Which statement describes break-even analysis correctly?

Which statement describes break-even analysis correctly?

• A. It determines the point at which costs exceed revenues.
• B. It determines the point where total revenues equal total costs; beyond it, profit is earned.
• C. It determines the maximum possible sales.
• D. It determines the minimum needed cash reserves.

Answer: (B)

Break-even analysis asks for the sales level at which all costs are covered by revenues. The key point is that at break-even, total revenues equal total costs, so profit is zero. Once you sell more than that level, the additional sales bring in more revenue than the variable costs of producing those units, so profit begins. This is why the correct statement describes the point where total revenues equal total costs, and beyond it, profit is earned. In practice, you can find the break-even point in units with fixed costs divided by the contribution per unit (selling price minus variable cost per unit); in dollars, it’s fixed costs divided by the contribution margin ratio. Break-even isn’t about maximizing sales or about minimum cash reserves; those are separate concepts.

Break-even analysis asks for the sales level at which all costs are covered by revenues. The key point is that at break-even, total revenues equal total costs, so profit is zero. Once you sell more than that level, the additional sales bring in more revenue than the variable costs of producing those units, so profit begins. This is why the correct statement describes the point where total revenues equal total costs, and beyond it, profit is earned. In practice, you can find the break-even point in units with fixed costs divided by the contribution per unit (selling price minus variable cost per unit); in dollars, it’s fixed costs divided by the contribution margin ratio. Break-even isn’t about maximizing sales or about minimum cash reserves; those are separate concepts.