Breakeven Selling Price and Breakeven Volume
Many small start-ups initially determine their product or service pricing by surveying the market to see what competitors are charging. While this is a good starting point, it does not account for the actual cost of production. Without calculating break-even pricing, businesses may unknowingly sell at a loss or fail to maximize profitability.
A break-even analysis is essential to compare market prices with the cost of production. Thoughtfully calculating the break-even price helps identify ways to improve efficiency, increase productivity, and enhance profitability. This price represents the minimum amount needed per unit to cover costs before making a profit.
Break-Even Formula
To determine the break-even selling price, a business must know:
- Total Fixed Costs- Expenses that remain unchanged regardless of production levels.
- Variable Costs Per Unit- Costs that vary with production volume.
- Volume of Production- The total number of units produced.
The break-even sale price formula is:
This formula helps businesses determine the lowest price at which they can sell their product without incurring losses.
Understanding Fixed and Variable Costs
Fixed Costs
Fixed costs do not change based on production levels. Examples include:
- Rent or mortgage payments
- Salaries (for permanent employees)
- Equipment costs
- Insurance and property taxes
Variable Costs
Variable costs fluctuate based on production levels. Examples include:
- Raw materials
- Hourly wages for production workers
- Utility costs (electricity, gas, water)
- Packaging and shipping costs
A key concept in break-even pricing is that fixed costs per unit decrease as production increases. The more units a business produces, the lower the fixed cost per unit, making it easier to set a competitive price.
Example of Fixed Costs Per Unit:
| Total Fixed Cost | Volume of Production | Fixed Cost Per Unit |
| $100 | 50 | $2 |
| $100 | 25 | $4 |
| $100 | 20 | $5 |
| $100 | 10 | $10 |
Calculating Break-Even Price
Once the fixed cost per unit is determined, add it to the variable cost per unit to compute the break-even sale price.
| Fixed Cost Per Unit | Variable Cost Per Unit | Break-Even Sale Price |
| $2 | $5 | $7 |
| $4 | $5 | $9 |
| $5 | $5 | $10 |
| $10 | $5 | $15 |
Impact of Pricing on Profitability
If a company sets a selling price of $10 per unit, let's examine profitability at different production levels:
| Sale Price | Volume of Production | Gross Income |
| $10 | 50 | $500 |
| $10 | 25 | $250 |
| $10 | 20 | $200 |
| $10 | 10 | $100 |
| Variable Cost Per Unit | Volume of Production | Total Variable Costs |
| $5 | 50 | $250 |
| $5 | 25 | $125 |
| $5 | 20 | $100 |
| $5 | 10 | $50 |
| Total Variable Costs | Total Fixed Costs | Total Costs |
| $250 | $100 | $350 |
| $125 | $100 | $225 |
| $100 | $100 | $200 |
| $50 | $100 | $150 |
| Gross Income | Total Costs | Profit/Loss |
| $500 | $350 | $150 |
| $250 | $225 | $25 |
| $200 | $200 | $0 |
| $100 | $150 | -$50 |
At a production level of 10 units, the company loses $50. At 50 units, it generates profit of $150.
This analysis highlights why businesses must increase production efficiency and scale production to maximize profits.
Alternative View: Break-Even Volume Calculation
Another way to analyze break-even is to calculate the number of units that must be sold to reach profitability. The formula is:
For example, if total fixed costs are $1,000, the selling price is $20 per unit, and variable costs are $10 per unit:
This means the company must sell at least 100 units to break even. If the business sells fewer than 100 units, it operates at a loss.
Key Takeaways
Understanding break-even pricing ensures profitability and long-term sustainability.
Production volume can lower costs and make pricing more competitive.
Market surveys alone do not determine price- cost calculations are essential.
Tracking costs through a financial model or spreadsheet helps monitor business health.
By calculating break-even pricing and monitoring production costs, businesses can make informed decisions, maximize profitability, and strategically position their products in the market.
