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Don Hofstrand Written, March 2007
Co-Director – Ag Marketing Resource Center
Iowa State University
dhof@iastate.edu |
Computing the breakeven selling price for your product is an important calculation when setting your sale price. It tells you the minimum price you can sell your product for and still cover your costs. The breakeven sale price should be computed over a range of production and sale quantities using the formula below.
Breakeven Sale Price = Total Fixed Cost + Variable Cost per Unit
Volume of Production
First you need to categorize your costs into the managerial cost categories of fixed and variable. A key concept in this formula is the fixed cost per unit of sales. Because total fixed costs are constant regardless of the volume of production, the fixed cost per unit of production drops as volume increases, as shown below.
Then divided the total fixed cost by the volume of production to calculate the fixed cost per unit of production.
Total Fixed Cost Volume of Production Fixed Cost per Unit
$100 divided by 50 equals $2
$100 divided by 25 equals $4
$100 divided by 20 equals $5
$100 divided by 10 equals $10 |
Next add the fixed cost per unit to the variable cost per unit to compute a total cost per unit. This is your breakeven sale price.
Total Cost per Unit
Fixed Cost per unit Variable Cost per Unit (breakeven sale price)
$2 plus $5 equals $7
$4 plus $5 equals $9
$5 plus $5 equals $10
$10 plus $5 equals $15 |
The larger the number of units you produce and sell, the smaller the sale price needed to breakeven, and vice versa. If selling price is set, profits may accrue at high volumes of production but losses occur at low volumes.
Assume that you pick a sale price of $10. Let’s examine what will happen to profits if you produce and sell a range of different quantities of the product.
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Sale Price Volume of Production Gross Income
$10 multiplied by 50 equals $500
$10 multiplied by 25 equals $250
$10 multiplied by 20 equals $200
$10 multiplied by 10 equals $100
Variable Cost per Unit Volume of Production Total Variable Costs
$5 multiplied by 50 equals $250
$5 multiplied by 25 equals $125
$5 multiplied by 20 equals $100
$5 multiplied by 10 equals $50
Total Variable Costs Total Fixed Costs Total Costs
$250 plus $100 equals $350
$125 plus $100 equals $225
$100 plus $100 equals $200
$50 plus $100 equals $150
Gross Income Total Costs Profit/Loss
$500 less $350 equals $150
$250 less $225 equals $25
$200 less $200 equals $0
$100 less $150 equals -$50 |
At sales of 50 units the business generates profits of $150. However, at sales of 10 units, a loss of $50 is incurred.