Break Even Point In Units Flashcards, test questions and answers

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What is Break Even Point In Units?

Break-even point in units is a concept used to understand the financial performance of a business. It defines the point at which total revenue from sales of goods or services equals total costs associated with producing those goods or services. In other words, it is the point at which a company’s revenues exactly cover its expenses and no profit or loss is made. At this point, the company neither gains nor loses money; therefore, it breaks even financially.The break-even point can be determined by calculating the number of units that must be sold before all production costs are recouped and profits begin to turn positive. To calculate this figure, one must know three basic facts: fixed costs (FC), variable costs (VC), and selling price per unit (SP). The formula for determining break-even in units is: Break Even Point in Units = Fixed Costs / (Selling Price per Unit – Variable Costs).For example, if a small business has fixed costs of $1000 and variable costs of $2 per unit, then their break-even point in units would be 500 ($1000 / ($5 – $2)). This means that they would have to sell 500 units before they could start making any profits on each additional sale above that amount. The calculation of break-even in units can help businesses understand how much they need to sell in order to turn a profit and when they should consider raising prices or cutting expenses in order to increase their profits margin. Additionally, understanding this metric can help owners assess whether certain products are worth continuing production on if their current sales levels cannot meet their associated cost structure.