Break-even in units is calculated as Fixed Costs divided by which quantity?

Break-even in units is calculated as Fixed Costs divided by which quantity?

• A. Price − Variable Cost
• B. Price
• C. Variable Cost
• D. Contribution Margin

Answer: (A)

The main idea here is that break-even in units is reached when the fixed costs are fully covered by the profit each unit contributes after variable costs are paid. That per-unit contribution is what matters, and it’s called the contribution margin per unit: price minus variable cost. So, break-even in units = Fixed Costs / (Price − Variable Cost). For example, if fixed costs are 1,000, the product sells for 20 and the variable cost per unit is 12, the contribution margin per unit is 8, and break-even occurs at 1,000 ÷ 8 = 125 units. Dividing fixed costs by price would ignore the variable costs that must be paid for each unit, leading to too few units to break even. Dividing by variable cost uses a cost value rather than the amount each unit adds toward fixed costs. Dividing by the total contribution margin (if interpreted as a total amount rather than per unit) isn’t the standard per-unit measure used for break-even.

The main idea here is that break-even in units is reached when the fixed costs are fully covered by the profit each unit contributes after variable costs are paid. That per-unit contribution is what matters, and it’s called the contribution margin per unit: price minus variable cost.

So, break-even in units = Fixed Costs / (Price − Variable Cost). For example, if fixed costs are 1,000, the product sells for 20 and the variable cost per unit is 12, the contribution margin per unit is 8, and break-even occurs at 1,000 ÷ 8 = 125 units.

Dividing fixed costs by price would ignore the variable costs that must be paid for each unit, leading to too few units to break even. Dividing by variable cost uses a cost value rather than the amount each unit adds toward fixed costs. Dividing by the total contribution margin (if interpreted as a total amount rather than per unit) isn’t the standard per-unit measure used for break-even.