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At the breakeven point, our contribution margin is equal to our total fixed costs. True/False

Answer:

True

What is Break-even points: Expalantion with Example

The break-even point is a critical term in business and finance that describes the point at which a company’s total revenues exactly equal its total costs. At this stage, a business is neither profitable nor losing money. It is the point at which the business “breaks even” in terms of covering all of its expenses.

To determine the break-even levels, you must evaluate both fixed and variable costs. Rent, insurance, and salary are examples of fixed expenditures that do not alter regardless of the level of production or sales. Variable costs, on the other hand, such as raw materials and direct labor, change with the degree of output or sales.

Let’s assume a company produces and sells widgets. The company incurs the following costs per month:

Fixed Costs (e.g., rent, utilities, salaries): $5,000 per month Variable Costs (e.g., raw materials, labor): $3 per widget Selling Price per Widget: $10 per widget

Using this information, we can calculate the break-even point:

Break-Even Point (in units) = Fixed Costs / (Selling Price per Unit – Variable Cost per Unit)

Break-Even Point = $5,000 / ($10 – $3) = $5,000 / $7 ≈ 714.29

In this case, the business must create and sell 715 widgets to reach the break-even point. The business will lose money if its production and sales fall below this level since its total expenses exceed its total income. However, once the company sells 715 widgets, it has covered all of its costs and begins to profit from each new widget sold.

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