Break-even is the point where total revenue equals total costs.

• A. True
• B. False
• C. It depends on market conditions
• D. Only applies to service businesses

Answer: (A)

Break-even is the point at which total revenue exactly covers total costs, so profit is zero. This happens because fixed costs and variable costs are paid out of revenue, and once revenue reaches the amount that covers both, there’s no remaining profit or loss.

Think of it in practical terms: fixed costs stay the same no matter how much you sell, while variable costs rise with each unit sold. The difference between the price you sell at and the variable cost per unit is the contribution toward covering fixed costs. When fixed costs are fully covered by these contributions, you’ve hit break-even.

For example, if fixed costs are $10,000 per month, you sell a product for $50, and the variable cost per unit is $30, the contribution per unit is $20. You’d need 10,000 / 20 = 500 units to break even. At 500 units, revenue is $25,000 and costs are $25,000, with zero profit. Sell more, and you start making a profit; sell less, and you incur a loss.

This concept isn’t limited to service businesses; it applies to any venture with costs and revenue. Market conditions can change price or costs and thus alter the break-even point, but the definition stays the same: revenue equals total costs.