Final answer:
The break-even point in sales dollars is found when the equation PQ = VQ + F is satisfied. To calculate it, solve for Q and then multiply by P. Understanding the break-even point helps a firm know when it will start to make a profit after all expenses are covered.
Step-by-step explanation:
The break-even point in sales dollars for a company that sells a single product can be calculated by determining the point where total revenue equals total costs. The break-even point occurs where the product of the selling price per unit (P) and the level of output (Q) equals the sum of the variable expense per unit (V) times the level of output and the fixed expense (F). Thus, the break-even point in sales dollars is when PQ = VQ + F. To find the break-even point in terms of sales dollars, solve for Q in the equation and then multiply by P to convert the quantity to sales dollars.
To illustrate, assume a firm has fixed costs of $160 and chooses a quantity to produce based on the market price and variable costs. If the variable cost per unit is lower than the market price, the firm is profitable on a variable cost basis, and needs only to cover the fixed costs to achieve break-even. As output increases, total cost, which is the sum of variable and fixed costs, also rises. The break-even point is essential for a firm as it indicates no profit or loss situation, just covering all the costs.