Which formula defines break-even in units?

• A. Fixed costs divided by contribution margin per unit.
• B. Fixed costs divided by contribution margin ratio.
• C. Contribution margin per unit divided by fixed costs.
• D. Sales price per unit minus fixed costs.

Answer: (A)

Break-even in units is found by matching the fixed costs with the amount each unit contributes to covering those costs. Each unit sold adds its contribution margin per unit (selling price minus variable cost). When the total contribution margin equals fixed costs, profit is zero. So the break-even point in units is fixed costs divided by the contribution margin per unit. This is the correct way to determine how many units must be sold to cover all costs.

If you use the contribution margin ratio instead, you’ll get break-even in sales dollars, not units, since fixed costs divided by the CM ratio tells you how much revenue is needed to break even. The other form—contribution margin per unit divided by fixed costs—mixes units and money in a way that doesn’t yield a valid break-even quantity, and subtracting fixed costs from the price ignores variable costs altogether.