# How to Calculate the Break Even Price

Do you know what price it takes to break even in your business? You'd better. It's the first goal in running a business and making a profit. Knowing the break even relationship between different prices and sales volumes is essential to developing a pricing strategy.

#### Tip

The formula to calculation a Break Even price is as follows:

Break Even Sales Price = (Total Fixed Costs/Production Volume ) + Variable Cost per Unit

## What Is a Break Even Price?

The break even price is the minimum price for your product that will cover your fixed costs at a specific volume of sales, according to Investopedia. The formula is:

Break Even Sales Price = (Total Fixed Costs/Production Volume ) + Variable Cost per Unit

Fixed costs are those expenses that must be paid, regardless of the sales volume. These include such expenses as rent, utilities, insurance, office salaries, licenses, accounting fees and advertising. These costs typically remain consistent regardless of manufacturing and sales volume, as well.

Variable costs are the costs to manufacture a product. These would include cost of materials, direct labor and supplies. As indicated by their name, these costs vary depending on the product and how it sells.

At a given price, a sales volume above the break even will produce a profit. This concept is best illustrated with an example.

## Example of the Calculation of a Break Even Price

The Hasty Rabbit Corporation makes sneakers for quick-footed rabbits and would like to introduce a new model called Swifty Feet. The corporate accountant has calculated the following costs:

• Cost of materials: \$18
• Direct labor: \$23
• Manufacturing supplies: \$8
• Cost per pair of sneakers: \$49
• Total fixed costs: \$375,000

For 50,000 pairs of sneakers:

Break even Sales Price = (\$375,000/50,000 units) + \$49 = \$56.50

For 75,000 pairs of sneakers:

Break even Sales Price = (\$375,000/75,000 units) + \$49 = \$54.00

For 100,000 pairs of sneakers:

Break even Sales Price = (\$375,000/100,000 units) + \$49 = \$52.75

Note that the break even sales price declines as the production volume goes up. This is because the fixed costs get spread over a larger number of units, while the variable costs of manufacturing, \$49 per pair, remains the same.

These variations in break even sales prices have implications for pricing strategies and the expected demand for the product at changing price points, according to North Carolina State University.

## Advantages of Break Even Pricing

Understanding the relationship between sales volume and pricing enable marketers to plan pricing strategies and advertising campaigns. The break-even analysis shows the impact of changes in prices and sales on profits, according to the University of Michigan.

If fixed costs are rising, break-even analysis will show how much you will need to increase sales volume or raise prices to make up for the increase costs. It's important to perform this break-even analysis to keep a business running smoothly.

Calculating break even prices at different sales volume provides valuable insights about individual product profitability and sales strategies. In a fiercely competitive market, pricing at break even points can be used to discourage new entrants and drive existing competitors out of the market.