Question

The break-even point is the sales level at which a company:

A) Maximizes Profit
B) Incurs Losses
C) Covers Variable Costs
D) Achieves Maximum Revenue

Answer 1

The break-even point is the sales level at which a company covers variable costs. If the price falls into the zone between the break-even point and the shutdown point, the firm will be making losses in the short run but still covering its variable costs. To achieve maximum revenue or to maximize profit, a company needs to operate above the break-even point where the price exceeds average cost.

Step-by-step explanation:

The break-even point is the sales level at which a company covers variable costs.

When the price falls exactly on the break-even point where the marginal cost (MC) and average cost (AC) curves cross, the firm earns zero profits. If the price falls into the zone between the break-even point and the shutdown point, the firm will be making losses in the short run but still covering its variable costs.

To achieve maximum revenue or to maximize profit, a company needs to operate above the break-even point where the price exceeds average cost.