Final answer:
The claim that one can compute the break-even point by dividing total sales by the CM ratio is false. The correct method involves dividing total fixed costs by the unit contribution margin to determine the break-even point in units.
Step-by-step explanation:
The statement that one way to compute the break-even point is to divide total sales by the CM ratio (Contribution Margin ratio) is false. To calculate the break-even point in units, you should divide the total fixed costs by the unit contribution margin, not the total sales. The contribution margin ratio represents the percentage of each sales dollar that contributes to covering fixed costs and generates profit. In other words, it's a measure of the profitability of a product, showing what percentage of sales contributes to the fixed costs.
To expand on this, let's consider an example where a firm has total fixed costs of $1,000 and produces a product that sells for $25 per unit with variable costs of $15 per unit. The contribution margin per unit would be sales price minus variable costs (i.e., $25 - $15 = $10). To find the break-even point, you would divide the total fixed costs by the contribution margin per unit ($1,000 / $10 = 100 units). At the sale of 100 units, the firm would cover all its fixed costs and variable costs, reaching the break-even point without profit or loss.