Why is break-even analysis useful for ABC?

• A. It helps estimate how much output is needed to become profitable.
• B. It guarantees profits if reached.
• C. It sets the price for products.
• D. It measures liquidity.

Answer: (A)

Break-even analysis shows the output level at which total revenue just covers total costs, so profits begin only after that point. This is useful for ABC because it turns the cost structure into a concrete sales target, helping assess whether a product is viable and how much must be produced and sold to start making money. The key idea is to compare fixed costs with the contribution per unit (selling price minus variable cost per unit). The break-even point in units equals fixed costs divided by the contribution per unit. For example, if fixed costs are 50,000, the price is 100, and variable cost per unit is 60, the contribution per unit is 40, and the break-even point is 1,250 units. Selling more than that yields profit, selling less yields loss. It does not guarantee profits (profits depend on sales above the break-even point), it doesn’t set prices, and it isn’t a measure of liquidity, which concerns cash flow and timing rather than overall cost-revenue balance.