Final answer:
The break-even sales level is the point at which a company's total sales revenue equals its total costs, resulting in zero profit or loss. It represents the level of sales that a company needs to cover all of its expenses. Companies need to know their break-even sales level to determine the minimum amount of sales needed to cover costs and start making a profit.
Step-by-step explanation:
The break-even sales level is the point at which a company's total sales revenue equals its total costs, resulting in zero profit or loss. It represents the level of sales that a company needs to cover all of its expenses. At the break-even point, a company is neither making a profit nor incurring a loss. It can be calculated by dividing the company's fixed costs by the contribution margin ratio.
For example, if a company has fixed costs of $10,000 and a contribution margin ratio of 40%, the break-even sales level would be $25,000 ($10,000 ÷ 40%). This means that the company needs to generate $25,000 in sales in order to cover all of its costs and avoid a loss.
It is important for companies to know their break-even sales level as it helps them determine the minimum amount of sales they need to achieve in order to cover their costs and start making a profit.