How to Calculate Selling Price From Break Even Chart

What is a Break Even Chart?

A break-even chart, also known as a contribution margin chart, is a graphical representation that shows the relationship between the selling price of a product and the total contribution margin. The break-even point is where total revenue equals total costs, indicating the minimum number of units that must be sold to cover all expenses.

The chart typically includes:

• Total Revenue Line: Shows the total income generated from sales.
• Total Cost Line: Represents the total expenses incurred.
• Contribution Margin Line: The difference between total revenue and total costs.
• Break-Even Point: The intersection of the total revenue and total cost lines.

How to Read a Break Even Chart

Reading a break-even chart involves analyzing the relationship between selling price and contribution margin. Here’s how to interpret the key components:

1. Total Revenue Line: This line shows the total income from sales. The slope of this line depends on the selling price and the number of units sold.
2. Total Cost Line: This line represents the total expenses, including fixed and variable costs. Fixed costs remain constant regardless of the number of units sold, while variable costs change with production volume.
3. Contribution Margin Line: This line represents the difference between total revenue and total costs. It helps determine the profit or loss at different production levels.
4. Break-Even Point: The point where the total revenue and total cost lines intersect. At this point, the company neither makes a profit nor incurs a loss.

By analyzing these lines, businesses can determine the optimal selling price to achieve desired profit levels and make informed decisions about pricing strategies.

Calculating Selling Price from Break Even Chart

To calculate the selling price from a break-even chart, follow these steps:

1. Identify the Break-Even Point: Determine the break-even point from the chart, which is the point where total revenue equals total costs.
2. Determine the Contribution Margin: Calculate the contribution margin, which is the difference between the selling price and the variable cost per unit.
3. Calculate the Selling Price: Use the contribution margin to determine the optimal selling price that ensures profitability.

This formula helps businesses determine the minimum selling price needed to cover all costs and achieve the desired profit level.

Example Calculation

Let’s consider an example to illustrate how to calculate the selling price from a break-even chart.

In this example, the selling price of $120 per unit ensures that the total revenue covers the total costs of $10,000 and achieves the desired profit of $2,000.