What is the Break-Even Price?
The break-even price is when thereceived from the sale of a product covers the expenses associated with producing that product.
How Does the Break-Even Price Work?
The basic idea behind a break-even price is to calculate the point at which Fixed costs do not change with the quantity of output. They do not change with the amount of output, and they are not zero when production is zero. Examples of include rent, insurance premiums or loan payments. change with the quantity of output. They are zero when production is zero. Examples of common variable costs include labor directly involved in a company's manufacturing process and raw materials.begin to exceed costs. To do this, one must first separate a company's costs into those that are variable and those that are fixed.
For example, at XYZ Restaurant, which sells only pepperoni pizza, the variable expenses per pizza might be:
Its fixed expenses per month might be:
Based on the total variable expenses per pizza, we now know that XYZ Restaurant must price its pizzas at $5.56 or higher just to cover those costs. But if the price of a pizza is $10, then the contribution, or the minus the variable cost for XYZ Restaurant is ($10 - $5.56 = $4.44).
But how many pizzas does XYZ Restaurant need to sell at $10 each to cover all those fixed monthly expenses? Well, if $4.44 is left over from each pizza afterfor variable costs, then we can determine that XYZ Restaurant must sell at least ($5,650 / $4.44 = 1,272.5) pizzas per month in order to cover monthly fixed costs.
It is important to revenue is reached, the fixed cost changes. For example, if XYZ Restaurant began selling 5,000 pizzas per month rather than just 2,000, it might need to hire a second manager, thus increasing labor costs.that some fixed costs increase "stepwise," meaning that after a certain level of
Why Does the Break-Even Price Matter?
Calculating a break-even price can be tricky, but it helps business owners determine when they'll begin to turn aand it helps them price their products with that in mind. It provides a dynamic overview of the relationships among , costs and profits.
However, typical variable anddiffer widely among industries. This is why comparison of break-even prices is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" break-even price should be made within this context.