Break-Even Price Formula

What is the Break-Even Price Formula?

The break-even price is defined as the level of price or amount that the seller of the business should quote that enables him to recover the costs of the business operations. The formula for break-even price can be described as follows: –

Break-Even Price Formula = (Fixed Cost / Production Volume) + Variable Cost
  • Fixed costs represent costs that the business or company in manufacturing has to bear to make itself sustainable. The fixed costs are independent of the volume of sales that the business generates on a day to day basis. The fixed costs comprise utilities, rent, insurance, salaries, fee on services taken, and marketing expense.
  • The variable costs are costs that vary basis the nature of the production. The variable costs comprise of expenses of direct labor, supplies expenses, and costs on materials.

Explanation of the Break-Even Price Formula

The formula for break-even price can be explained by using the following steps:

  • Step 1: Firstly, divide all costs incurred by the business into variable costs and fixed costs.
  • Step 2: Next, determine the production capacity or the volume of the finished goods that the business plans to produce.
  • Step 3: Next, divide the fixed costs by the production capacity.
  • Step 4: Next, determine the manufacturing supplies, direct labor costs, and supplies expenses.
  • Step 5: Now, add the segregated components of variable costs to arrive at the total variable costs per unit.
  • Step 6: Now, add the resulting value in step 3 with the resulting value in step 5 to arrive at the break-even price.

Break-Even Price Formula

How to Calculate Break-even Price? (With Excel Template)

Below are the examples of the Break-even price formula.

You can download this Break-Even Price Formula Excel Template here – Break-Even Price Formula Excel Template

Break-even Price Formula Example #1

Let us take the example of a business restaurant. The restaurant business incurs an expense of $3,000 on rental costs. It has to bear $5,000 on salaries and $500 on accountant fees on tallying sales achieved by the restaurants.

The business can cater to a footfall of 1,500 people. It incurs an expense of $30 per unit on account of procuring food supplies. It has to pay for $80 per unit on account of liquor. Help the management determine the breakeven price for the business.

Solution:

Use the below-given data:

Break-even price Formula Example 1

Determine the fixed costs as displayed below: –

Fixed Costs = (Rental Expense + Salaries + Accounting Fee)

Calculation of Fixed Cost can be done as follows:

Break-even price Formula Example 1-1

Fixed Cost = $3,000 + $5, 000 + $500

Fixed Cost will be:-

Break-even price Formula Example 1-2

Fixed costs = $8,500

Determine the variable costs as displayed below: –

Variable Cost = Food Supplies + Liquor Expense

Calculation of Variable Cost can be done as follows:

Example 1-3

Variable Cost =$30 + $80

Variable Cost will be:-

Variable Cost Example 1-4

Variable Cost = $110

Determine the break-even price as displayed below: –

Break-even price Formula Example 1-5

Break-Even Price = ($8,500 / 1,500) + $110

Break-Even Price will be:-

Break-even price Formula Example 1-6

Break-even Price for the Business = $115.67

Therefore, the business has to sell at the break-even price of at and above $115.67 per customer order to sustain and to recover over the costs.

Break-even Price Formula Example #2

Let us take the example of a medium-scale furniture business which specializes in making new chairs. The firm has determined that the variable costs per unit are $200. The firm additionally has to bear fixed costs of $10,000.

The business generates 2,000 units of chairs as per its production capacity. Help the management of the company determine the breakeven price for the business.

Solution:

Use the below-given data for the calculation of break-even price:

Given data Example 2

Determine the break-even price as displayed below: –

Break-even price Formula Example 2-1

Break-Even Price = (($10,000 / 2,000) + $200)

Break-Even Price will be:-

Break-even price Formula Example 2-2

The break-Even price for the business = $205

Therefore, the business has to sell at the break-even price of at and above $205 to sustain the costs of producing 2,000 new chairs.

Break-Even Price Formula Example #3

Let us take the example of a manufacturing business that manufactures shoes. The firm incurs Direct Labor expense of $40 per pairs of shoes. It additionally incurs direct materials expense of $55 per pair of shoes and $35 as the costs of manufacturing. The business, on average, produces 10,000 pairs of shoes.

The business additionally incurs fixed costs of $30,000. Help the management determine the break-even price for the business.

Solution:

Use the below data for the calculation of the break-even price.

Given data Example 3

Determine the total variable costs incurred by the business: –

Total Variable Cost = Direct Labor + Direct Materials + Manufacturing Expense

Break-even price Formula Example 3-1

Total Variable Cost = $40 + $55 + $35.

Variable Cost Example 3-2

Total Variable Cost = $130.

Determine the break-even price as displayed below: –

Break-even price Formula Example 3-3

Break-Even Price = ($30,000 / 10,000) + $130

Break-even price Formula Example 3-4

Break-Even Price = $133

Therefore, the business has to sell at the break-even price of at and above $133 to sustain the costs of the manufacturing business.

Break-Even Price Calculator

You can use this Break-Even Price Calculator.

Fixed Cost
Production Volume
Variable Cost
Break-Even Price Formula
 

Break-Even Price Formula =
Fixed Cost
+ Variable Cost =
Production Volume
0
+0 = 0
0

Relevance and Uses

  • Breakeven analysis is one of the crucial topics in management and cost accounting. A break-even price helps in the calculation of price that the business has to offer to its customers for making a profit and cover its cost. In a simpler sense, it helps in the overall assessment of the situation of profitability for the business or any new projects undertaken.
  • It can be referred to as the methodology wherein different price levels, and cost levels are compared to arrive at the best pricing model for the business to attain good levels of profitability.
  • The break-even price analysis, therefore, can be regarded as an objective-based analysis of profitability. It can be utilized to determine the pricing levels for a new project in pipelines for an existing business, and therefore it is one of the components of the project management.
  • This analysis is regarded as a critical analysis mechanism because it helps the business know how much sales it should achieve to cope up with rising fixed costs and variable costs.
  • It helps the marketers to develop an effective marketing strategy as they know the pricing model as per the analysis performed and hence focus their efforts on getting the best results or sales for the business.
  • Comprehensive analysis of costs with respect to sales with a derivation of a good break-even model can make an entry for new participants into the markets difficult, as well as it could make existing competitors go out of business.

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This has been a guide to the break-even price formula. Here we discuss how to calculate break-even price along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

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