{"id":31219,"date":"2021-09-21T08:00:08","date_gmt":"2021-09-21T08:00:08","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=31219"},"modified":"2026-03-31T12:14:19","modified_gmt":"2026-03-31T12:14:19","slug":"break-even-and-shut-down-points-of-production","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/break-even-and-shut-down-points-of-production\/","title":{"rendered":"Break-even and Shut-down Points of Production"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Topics in Demand and Supply Analysis (2023 Level I CFA\u00ae Exam \u2013 Economics \u2013 Module 1)\",\n  \"description\": \"This video covers key concepts in demand and supply analysis, including calculating and interpreting price, income, and cross-price elasticities, substitution and income effects, distinguishing normal vs. inferior goods, diminishing marginal returns, breakeven and shutdown points, and the impact of economies and diseconomies of scale on costs.\",\n  \"uploadDate\": \"2022-03-09T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/g7wPVGgRfVc\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/g7wPVGgRfVc\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/g7wPVGgRfVc\",\n  \"duration\": \"PT28M37S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Break-even-Point-of-Production.png\",\n  \"caption\": \"Break-even Point of Production\",\n  \"width\": 974,\n  \"height\": 668,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12e.png\",\n  \"caption\": \"Shutdown Point of Production\",\n  \"width\": 974,\n  \"height\": 668,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"The short-term shut-down point of production for a firm operating under perfect competition will most likely occur when the price per unit is equal to:\",\n    \"text\": \"The short-term shut-down point of production for a firm operating under perfect competition will most likely occur when the price per unit is equal to:\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Average variable cost per unit.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Marginal cost per unit.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Average total cost per unit.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Break-even-Point-of-Production.png\",\n  \"caption\": \"Break-even point of production showing total revenue and total cost curves\",\n  \"width\": 974,\n  \"height\": 668,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Economics Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\"\n  width=\"611\"\n  height=\"344\"\n  src=\"https:\/\/www.youtube.com\/embed\/g7wPVGgRfVc\"\n  title=\"YouTube video player\"\n  frameborder=\"0\"\n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\"\n  referrerpolicy=\"strict-origin-when-cross-origin\"\n  allowfullscreen>\n<\/iframe>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Break-even Point of Production<\/strong><\/h2>\n\n\n\n<p>The break-even point can be defined as the production and sales levels of a given product at which the revenue generated from the sales is perfectly equal to the production cost. At this point, the company does not make any profit or loss; it breaks even.<\/p>\n\n\n\n<p>The production cost of every product is divided into two components: the fixed cost components and the variable cost components.<\/p>\n\n\n\n<!--more-->\n\n\n\n<div style=\"text-align: center; margin: 22px 0;\">\n  <div style=\"max-width: 680px; margin: 0 auto;\">\n    <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"\n       style=\"display: flex; align-items: center; justify-content: center;\n       width: 100%; padding: 10px 18px;\n       border: 2px solid #1e5bd8; color: #1e5bd8;\n       border-radius: 9999px; text-decoration: none; font-weight: 600;\">\n      Practice break-even and shutdown decisions with our free trial\n    <\/a>\n  <\/div>\n<\/div>\n\n\n<p><strong style=\"color: revert; font-size: revert;\">Fixed Costs<\/strong><\/p>\n<p>Fixed costs are those costs that remain the same regardless of the level of production of any company. A good example is a cost incurred in setting up production facilities, e.g., rent, fixed interest charges, and depreciation.<\/p>\n<h3><strong>Variable Costs\u00a0<\/strong><\/h3>\n<p>Variable costs are directly proportional to the volume produced, and examples include raw materials, wages paid, and other incurred expenses.<\/p>\n<p>A company must fix its selling price above the variable costs incurred per unit of production. The difference between the selling price and the variable costs is referred to as the contribution to fixed costs and profits.<\/p>\n<p>An increase in sales causes a direct increase in contribution. At the break-even point of sales, the contribution is strictly equal to the fixed cost. Therefore, companies will report losses below this point and profits above this point.<\/p>\n<p>After identifying the types of production costs, it is now possible to calculate the break-even point of production because this is where you will either make a profit or a loss.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-16916 size-full\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Break-even-Point-of-Production.png\" alt=\"Break-even Point of Production\" width=\"974\" height=\"668\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Break-even-Point-of-Production.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Break-even-Point-of-Production-300x206.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Break-even-Point-of-Production-768x527.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Break-even-Point-of-Production-400x274.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/p>\n<p>If we want to determine the number of units that can be produced and sold to break even, we can use the following formula:<\/p>\n<p>Break-even point of production=\\(\\frac{FC}{P-VC}\\)<\/p>\n<p>Where,<\/p>\n<p>\\(FC\\)=Fixed cost<\/p>\n<p>\\(P\\)=Selling Price per unit of production<\/p>\n<p>\\(VC\\)=Variable cost per unit<\/p>\n<p>Note that the denominator of the above formula is the contribution margin per unit of production.<\/p>\n<h4><strong>Example: Break-even Point of Production<\/strong><\/h4>\n<p>The total fixed cost of a manufacturing company is $300,000, and the variable cost per unit produced is $150. If the selling price of one unit is $300, calculate the break-even point of production.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>We know that:<\/p>\n<p>break-even point of production=\\(\\frac{FC}{P-VC}=\\frac{300,000}{300-150}=2,000\\); and<\/p>\n<p>this is the number of units that must be produced and sold to break even.<\/p>\n<h2><strong>Shut-down Point of Production<\/strong><\/h2>\n<p>The shut-down point refers to the minimum price for companies that prefer shutting down their operation instead of continuing to operate. In other words, it is the minimum price and quantity for keeping operations open.<\/p>\n<p>The variable cost per unit (written as marginal cost, MC, on the following graph) falls with an increase in the number of units produced up to a certain point. After this point, the variable cost rises.\u00a0 Consequently, a U-shaped curve is realized when quantity is plotted on the x-axis against the average variable cost on the y-axis.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-15007 size-full\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12e.png\" alt=\"shut-down-point of production\" width=\"974\" height=\"668\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12e.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12e-300x206.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12e-768x527.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12e-400x274.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/p>\n<p>As seen previously, the break-even point is the point where the marginal cost (MC) equals the average total cost (AT C). The shut-down point of production, on the other hand, is the price at which the marginal cost equals average variable costs (AVC). At this point, the company is better off stopping its production than keeping producing at a loss.<\/p>\n<h4><strong>Example: Shut-Down Point of Production<\/strong><\/h4>\n<p>Assume that a manufacturing company produces 1000 units and sells them at $5 each (Total Revenue (TR) is 5 \u00d7 1,000=$5,000),\u00a0 Average Total Cost (ATC) is $7,000,\u00a0 fixed cost (FC) is $4000, and a variable cost (VC) is $3,000 for all units. Evidently, this manufacturing company is operating at a loss of -$2000 (economic loss). In economics, we assume that the FC cannot be avoided. The company is obliged to pay it up regardless of whether it operates or not. That is, if it closes its operations,\u00a0 the revenue will be zero, but it will still incur a $4,000 fixed cost.<\/p>\n<p>If it continues its operations, it will earn a revenue of $5000, pay a variable cost of $3000 and use $2000 to pay the fixed cost. In this instance, the company will lose less by continuing its operations. However, the company will exit the market in the long run unless prices increase because, eventually, the average variable costs exceed average revenue (AR). Thus it will shut down at the point of minimum average variable cost (AVC), as seen on the graph.<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>The short-term shut-down point of production for a firm operating under perfect competition will <em>most likely<\/em> occur when the price per unit is equal to:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>\u00a0marginal cost per unit.<\/li>\n<li>\u00a0average total cost per unit.<\/li>\n<li>average variable cost per unit.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>C<\/strong>.<\/p>\n<p>Any firm will shut down its production when the marginal cost is less than average variable cost. We will see later that for a firm in perfect competition to maximize profit, marginal revenue must be equal to marginal cost.<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr \/><\/div>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"background: #1a73e8; color: #ffffff; padding: 14px 26px; border-radius: 999px; text-decoration: none; font-weight: bold; font-size: 16px; display: inline-block;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\n<p style=\"margin-top: 10px; font-size: 14px; color: #555;\">Access CFA Level I practice questions, video lessons, and study notes covering break-even analysis, production costs, and other key microeconomics concepts.<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Break-even Point of Production The break-even point can be defined as the production and sales levels of a given product at which the revenue generated from the sales is perfectly equal to the production cost. At this point, the company&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-31219","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Break-Even vs Shutdown Points Explained | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Explore break-even and shutdown points in production, including key concepts like variable costs, shutdown price, and the point where total costs equal revenue.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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