Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

What is the formula for calculating the break-even point?

1. Total monthly cost / Selling price

2. Total revenue - Total expenses

3. Total fixed costs / Contribution margin per unit

4. Total income / Total liabilities

The correct answer is: Total monthly cost / Selling price

The correct formula for calculating the break-even point is based on the concept of fixed costs and contribution margin, which tells you how many units need to be sold to cover all costs. The break-even point occurs when total revenue equals total costs, meaning there is neither profit nor loss. When considering the available choices, the formula that reflects this relationship is the division of total fixed costs by the contribution margin per unit. This calculation allows a business owner to determine how many units must be sold to cover the fixed costs of the business, with each unit contributing a certain amount toward covering those costs after variable costs have been accounted for. In contrast, using total monthly costs divided by the selling price does not accurately reflect the break-even point, as it overlooks the contribution margin and the distinction between fixed and variable costs. The approach of subtracting total expenses from total revenue provides insights into profitability but does not specifically determine the break-even volume of sales. Finally, total income divided by total liabilities is a measure related to financial health and does not pertain to break-even analysis. Understanding the break-even point is crucial for entrepreneurs as it informs them about the minimum performance required to avoid losses, guiding financial and operational planning.