Break Even Pricing

Posted in Marketing and Strategy Terms, Total Reads: 3277
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Definition: Break Even Pricing

It refers to that selling price of an entity when the entire costs of producing it are”just” recovered. Mathematically, it is:

Break Even Price (Selling Price)

= Total Costs of acquisition or manufacturing that entity

 = Fixed Costs + Variable Costs

Selling at breakeven price results zero gain or  zero loss. It is the minimum price at which an entity should be sold in the market without incurring a loss.

Fixed Costs

These are the costs that do not change with the quantity produced and remains constant. Examples can be the rent, property tax, insurance, etc.

BEP.

Variable Costs

These costs depend on the quantity produced and vary with the production levels. They increase with the increase in production volumes.Examples are labor cost, material cost, etc.

Total Cost = Fixed Cost + Variable Cost

Break Even Chart

It is a graphical representation of costs at different levels as shown below-

 

P represents the breakeven point where the income is equal to the total costs and the profit is zero.

Advantages of Break Even Analysis

  1. It can be interpolated to find the changes in profit levels and break even points upon changes in fixed costs, variable costs and commodity prices.
  2. It is useful in capital budgeting techniques.
  3. It represents the minimum amount of sales necessary to prevent losses.

Limitations of Break Even Analysis

The classification of costs into fixed and variable is not very clear. And it is suited only to the analysis of one product at a time.

 

 

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