Final answer:
To determine the break-even point, a firm needs to calculate the contribution per unit, which is essential to identify the number of units needed to be sold to achieve a break-even position.
Step-by-step explanation:
To determine the break-even point, a firm must first calculate the contribution per unit. This involves subtracting the variable cost per unit from the selling price per unit.
With the contribution per unit calculated, the firm can then determine the number of units it needs to sell to cover all its fixed costs and achieve a break-even position. The break-even point is the sales level at which total revenues equal total costs, resulting in neither profit nor loss. In perfect competition, where the firm is a price taker, the market price is constant.
Therefore, to calculate total revenue, the firm multiplies this constant price by the quantity produced at all output levels. If the firm is making economic losses, it must decide whether to continue producing where price equals marginal revenue and marginal cost or to shut down and only incur its fixed costs.