Final answer:
When more than one product is sold, the break-even point can be determined by dividing fixed expenses by the contribution margin.
Step-by-step explanation:
The contribution margin is defined as the selling price per unit minus the variable cost per unit. It represents the portion of each sale that contributes to covering the fixed costs, also known as overhead. For instance, if the fixed cost, or overhead, is $1,000, as the quantity of output increases, the average fixed cost decreases because the fixed cost is spread over a larger number of units.
This phenomenon is known as spreading the overhead. The average fixed cost curve typically shapes downward as output increases, reflecting that as more units are produced, the fixed cost allocated to each unit gets smaller.
Understanding the concept of break-even analysis is critical for a business as it helps in determining the level of sales needed to cover all fixed and variable costs. Operations below the break-even point would result in a loss, compelling a firm to decide whether to continue production or to shut down. The preferable option is the one that minimizes losses or, ideally, avoids them entirely.