Question

Which of the following statements about the break-even point is true?

A) It is used to determine how many more units need to be sold to increase market share by a specific amount.
B) It is a technique used to calculate fixed costs.
C) It determines the amount of retained earnings a company will have during an accounting period.
D) It is a technique marketers use to examine the relationship between supply and demand.
E) It is calculated using contribution per unit costs and total fixed costs.

Answer 1

Option E is correct; the break-even point is calculated using contribution per unit costs and total fixed costs, which is when a company neither earns a profit nor incurs a loss.

Step-by-step explanation:

The correct statement about the break-even point is that it is calculated using contribution per unit costs and total fixed costs, making option E the true statement. The break-even point is a crucial financial concept used to analyze the financial performance of a company. It represents the level of output at which total revenues and total costs are equal, meaning the company makes no profit but also incurs no losses. It is essentially a point where the price equals average cost (AC), resulting in zero economic profits.

In the context of a perfectly competitive market, firms need to consider the market price when determining their output levels, as they cannot influence the price themselves. The break-even point occurs where the marginal cost curve intersects the average cost curve at its minimum. If the firm's operating price is at the break-even point, it simply breaks even; if the price is above it, the firm earns a profit; if the price is below but still above average variable cost, it can continue to operate in the short term.