CPIM Practice Exam

In cost-volume-profit analysis, what is the breakeven quantity?

1. The level of production at which total costs equal total revenue

2. The number of units sold at a profit

3. The maximum profit achievable

4. The point where fixed costs are covered

The correct answer is: The level of production at which total costs equal total revenue

The breakeven quantity is defined as the level of production at which total costs equal total revenue. This means that at this specific output level, a business does not incur a profit or a loss; the revenue generated from selling goods or services is exactly enough to cover all fixed and variable costs associated with production. Understanding the concept of breakeven is crucial for businesses because it provides a clear target to aim for in terms of sales volume. By calculating the breakeven quantity, companies can make informed decisions about pricing strategies, cost management, and production levels. This metric helps businesses assess risk and plan for profitability, as knowing how many units need to be sold to start making a profit is fundamental to sustaining operations. The other options relate to different aspects of a company’s financial situation but do not align with the definition of breakeven quantity. Some focus on profitability or costs in a different context, which while important, do not define the breakeven point accurately. This clarity on breakeven helps stakeholders strategize effectively in terms of market conditions and financial planning.