Fundamentals Of Accountancy, Business, And Management (FABM) 2 Practice Exam

Calculating break-even in units hinges on how much each unit “contributes” toward fixed costs after covering variable costs. This contribution per unit is the selling price minus the variable cost per unit. To find how many units are needed to cover fixed costs, you divide the total fixed costs by the contribution margin per unit. In formula terms, break-even units = fixed costs ÷ (selling price per unit − variable cost per unit). If the contribution margin per unit is zero, you can never break even with positive fixed costs. The other approaches miss this idea. Multiplying fixed costs by the contribution margin per unit would not reflect how many units you must sell; it would overstate the requirement. Using the sales price per unit ignores the variable costs that reduce the amount each unit adds toward fixed costs. Adding total variable costs to fixed costs in the numerator isn’t the right way to form the amount each unit must cover; the correct calculation already accounts for variable costs through the contribution margin.