What is the break-even point?

• A. The level at which total revenue is maximized.
• B. The level where fixed costs are zero.
• C. The level where variable costs equal fixed costs.
• D. The sales level where total revenue equals total costs, yielding zero operating income.

Answer: (D)

The break-even point is the sales level at which total revenue covers all costs, so operating income is zero. At this point the money coming in from sales exactly equals fixed costs plus variable costs, leaving no profit or loss. This shows how much you must sell before you start making money; beyond this point, each additional unit sold adds to profit through the contribution margin (price minus variable cost).

You can compute it as fixed costs divided by the contribution margin per unit, or fixed costs divided by the contribution margin ratio in total sales. For example, if fixed costs are 10,000, the price is 50 and the variable cost per unit is 30, the contribution margin per unit is 20, so break-even units are 10,000 / 20 = 500. At break-even, revenue is 500 × 50 = 25,000, and total costs are 25,000, giving zero profit.

The other statements describe different ideas: revenue maximization isn’t the break-even point, fixed costs being zero isn’t required, and fixed costs equaling variable costs isn’t the defining condition.