CSLB Law & Business ExamBusiness FinancesMedium
A contractor has $30,000 in monthly fixed overhead and averages a 25% gross profit margin on sales. What monthly sales volume is needed to break even?
- A$90,000
- B$150,000
- C$120,000
- D$37,500
Show answer & explanationAnswer & explanation
Correct answer: C. $120,000
Break-even sales = Fixed Costs ÷ Gross Profit Margin = $30,000 ÷ 0.25 = $120,000. At this sales level, gross profit exactly covers the fixed overhead.
Why the other options are wrong
- A. This divides fixed costs by 33% instead of the actual 25% margin.
- B. This overstates the required sales volume beyond what is needed to break even.
- D. This is only 25% of the correct sales figure, not the break-even amount.
Break-Even Sales Volume
The amount of sales revenue needed for gross profit to exactly cover fixed overhead costs, resulting in zero net profit.
- Formula: Break-even sales = Fixed Costs ÷ Gross Profit Margin
- Below break-even, the business operates at a loss
- Used to set minimum monthly sales goals
Memory trick: Fixed costs divided by margin tells you the finish line for 'no loss.'