The break-even price is the price that must be assigned to a good or a product in order to cover the expenses that occurred in producing that product.
How Break Even Price is calculated
The basic objective of calculating a break-even price is to get a general idea that at what point the sales of the product will begin to exceed the costs and will be converted into the profit. In order to find the break-even price we need to find out the costs of the good produced. The costs can be categorized into two types and these are the variable and the fixed costs. Fixed costs are the costs that remain fixed throughout the production. These costs don’t change with the change in the quantity of the production, the amount of production and are not zero if there is zero production. The examples of fixed costs include rent, insurance premiums paid by the company or the loan payment due at the company. On the other hand variable costs are the costs that change with the change in production and quantity of the goods being manufactured. The examples of variable costs can be the cost of the raw materials, labor hired for production etc. In order to calculate break-even price lets have an example of a restaurant that delivers pizzas in nearby towns.
Its fixed expenses per month might be:
On the basis of the total variable expenses per pizza, we now know that XYZ Restaurant must price its pizzas at $5.56 or more than this amount just to cover those costs. But if the price of a pizza is $10, then the contribution margin or the revenue minus the variable cost for XYZ Restaurant is as under
($10 – $5.56 = $4.44)
But the question now arise that how many pizzas does XYZ Restaurant need to put up for sale at $10 each to envelop all those fixed monthly expense. The answer is if $4.44 is left over from each pizza after accounting for variable costs, then we can conclude that XYZ Restaurant must sell at least ($5,650 / $4.44 = 1,272.5) pizzas per month in order to cover monthly fixed costs.
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