If Fixed Costs are 60,000; Average Price 15; Variable Costs 9; Break-even point in units?

If Fixed Costs are 60,000; Average Price 15; Variable Costs 9; Break-even point in units?

• A. 10,000
• B. 6,000
• C. 12,000
• D. 15,000

Answer: (A)

Break-even is the point where revenue just covers all costs. Each unit sold adds to fixed costs by its contribution, which is the price minus the variable cost per unit. Here that contribution per unit is fifteen minus nine, equals six. To cover fixed costs of sixty thousand, you divide sixty thousand by six, giving ten thousand units. So the break-even point is ten thousand units. At that level, revenue is fifteen per unit times ten thousand units (one hundred fifty thousand), and total costs are fixed sixty thousand plus variable cost per unit times ten thousand (ninety thousand), which also totals one hundred fifty thousand. Producing fewer than ten thousand wouldn’t fully cover costs, while producing more would yield a profit.

Break-even is the point where revenue just covers all costs. Each unit sold adds to fixed costs by its contribution, which is the price minus the variable cost per unit. Here that contribution per unit is fifteen minus nine, equals six. To cover fixed costs of sixty thousand, you divide sixty thousand by six, giving ten thousand units. So the break-even point is ten thousand units. At that level, revenue is fifteen per unit times ten thousand units (one hundred fifty thousand), and total costs are fixed sixty thousand plus variable cost per unit times ten thousand (ninety thousand), which also totals one hundred fifty thousand. Producing fewer than ten thousand wouldn’t fully cover costs, while producing more would yield a profit.