What is the break-even point and how is it calculated?

• A. BEP (units) = fixed costs / (price per unit − variable cost per unit).
• B. BEP (units) = fixed costs × price per unit.
• C. BEP (units) = total variable costs ÷ price per unit.
• D. BEP (units) = (price per unit − variable cost per unit) ÷ fixed costs.

Answer: (A)

The break-even point is the sales level where total revenues cover all costs, so profit is zero. To find BEP in units, you divide fixed costs by the contribution margin per unit, which is the price per unit minus the variable cost per unit. This contribution margin shows how much each unit sold adds to covering fixed costs. For example, if fixed costs are 10,000, price is 50, and variable cost per unit is 30, the contribution margin is 20, so BEP in units is 10,000 ÷ 20 = 500 units. The other formulas don’t reflect how fixed costs are spread across the per-unit margin or mix fixed costs with price incorrectly, so they don’t yield the true break-even point. Therefore, the correct calculation is fixed costs divided by (price per unit minus variable cost per unit).