Question

In a cost-volume-profit analysis, explain what happens at the break-even point and why companies do not want to remain at the break-even point. In a paragraph, explain the concept in simple terms.

Answer 1

In cost volume-profit analysis, Break Even point is the point at which a firm is earning no profits and facing no losses - i.e, No Profit/Loss . It is calculated by formula, Break even point = Fixed cost / cocntribution per unit. This represents the level of sales which must be obtained in order to cover the costs.

Companies do not remain at break even point as in order to sustain in long run and expand the business operations one must earn profit margin while at Break even there is no profit. Most of the company's objective is profit maximization and hence they do not want to remain at the 'Break-even' point.

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