Association for Financial Professionals (AFP) Practice Exam 2025 – All-in-One Guide to Master Your Certification!

The calculation of fixed costs divided by the contribution margin per unit allows businesses to determine their break-even point. The break-even point is the level of sales at which total revenues equal total costs, meaning the business is not making a profit but also not incurring a loss.

In this context, fixed costs are the expenses that do not change with the level of production or sales, such as rent, salaries, and certain utilities. The contribution margin per unit is calculated as the selling price per unit minus variable costs per unit, indicating how much each unit sold contributes to covering fixed costs and generating profit. By using this formula, businesses can identify how many units they need to sell to cover all fixed costs, thus pinpointing their break-even sales volume.

This understanding is crucial for financial planning, pricing strategy, and overall business decision-making, as it helps companies ascertain the minimum sales necessary to avoid losses.