Jaunty Coffee Co. currently has a level of sales that results in the company being below its break-even point. Which set of actions can be taken to help Jaunty reach its break-even point?

• A. Raise the price per unit, lower the variable cost per unit, lower fixed costs
• B. Increase the price per unit only
• C. Increase variable costs
• D. Increase fixed costs

Answer: (A)

When you’re below break-even, you need to improve the amount of money each unit contributes to covering fixed costs or reduce the fixed costs themselves. Break-even occurs where total revenue equals total costs, and the number of units needed to reach that point depends on the contribution margin per unit: Price minus Variable Cost per unit. Break-even in units = Fixed Costs / Contribution Margin per unit.

Raising the price per unit increases the contribution margin, so each unit brings in more to cover fixed costs. Lowering the variable cost per unit also increases the contribution margin, further reducing the number of units needed. Lowering fixed costs reduces the amount that must be covered, directly lowering the break-even point. Taking all three steps together makes reaching break-even far more attainable when sales are currently below that level.

Options that raise costs (either variable or fixed) would push break-even further away, and increasing price alone, while helpful, may not be sufficient without also reducing costs.