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Agricultural Marketing Resource Center

Breakeven Selling Price

Don Hofstrand  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.

      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.

 

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