**Answer to CVP question**
Break-even point is when profits = 0.

There are two steps to calculate the break-even point (in units) in this scenario:

1) Calculate the contribution margin per unit: selling price per unit -- variable cost per unit

2) Calculate the break-even sales (in units): fixed costs divided by contribution margin per unit

Steps:

1) Contribution margin is the difference between sales and variable costs. Essentially, contribution margin covers fixed costs and profits.

Contribution = Variable costs + profits

At break-even: profits = 0

At break-even: contribution = variable costs + profits = variable costs + 0

Contribution margin per unit divides total contribution margin by the number of units sold.

In this case, contribution margin per unit equals: ($70,000 - $28,000) / 7,000 = $6

$6 per unit sold contributes toward fixed costs and profits.

2) So how many units do we need to sell to cover fixed costs and make 0 profit?

Break-even point in units: fixed costs / contribution per unit

In this case, break-even point in units equals: $12,000 / $6 = 2,000 units

If we sell 2,000 units, we will break even in this case:

Sales - variable costs - fixed costs = 0.

(2,000 units x $10 sales price per unit) - (2,000 units x $4 variable cost per unit) - $12,000 = 0.

Answer: 2,000 units

To learn more about cost-volume-profit analysis, refer to the tutorial on Simplestudies.

Accounting Cost-Volume-Profit Analysis: Online Accounting Tutorial & Questions | Simplestudies.com