How to Calculate The Break Even Price

The break even price is the price at which a business neither makes a profit nor incurs a loss. It's calculated by determining the point where total revenue equals total costs. This guide explains how to calculate it, including the formula, step-by-step instructions, and practical examples.

What is Break Even Price?

The break even price is the minimum price at which a business can sell a product or service to cover all its costs and start making a profit. It's a critical financial metric that helps businesses determine pricing strategies and assess market viability.

Understanding the break even price helps businesses:

Set competitive yet profitable prices
Assess the financial viability of new products
Plan production and inventory levels
Evaluate pricing strategies for different markets

Break Even Price Formula

Break Even Price = (Total Fixed Costs + Total Variable Costs) / Quantity Sold

Where:

Total Fixed Costs are costs that don't change with production volume (rent, salaries, etc.)
Total Variable Costs are costs that vary with production volume (materials, labor, etc.)
Quantity Sold is the number of units you plan to sell

Note: This formula assumes you're selling at a single price point. For products with multiple price points, you'll need to calculate the break even quantity first.

How to Calculate Break Even Price

Step 1: Identify Your Costs

List all your fixed and variable costs. For example:

Fixed costs: $5,000/month for rent, $3,000/month for salaries
Variable costs: $10 per unit for materials, $5 per unit for labor

Step 2: Determine Your Sales Volume

Estimate how many units you plan to sell. For this example, let's assume 1,000 units per month.

Step 3: Apply the Formula

Using the formula:

Break Even Price = ($5,000 + $3,000 + ($10 + $5) × 1,000) / 1,000

= ($8,000 + $15,000) / 1,000

= $23,000 / 1,000

= $23 per unit

Step 4: Interpret the Result

A break even price of $23 means you need to sell each unit for at least $23 to cover all costs and start making a profit.

Worked Example

Let's calculate the break even price for a small business:

Cost Type	Amount
Fixed Costs	$10,000 (rent, utilities, insurance)
Variable Costs per Unit	$15 (materials, labor)
Planned Sales Volume	5,000 units

Using the formula:

Break Even Price = ($10,000 + $15 × 5,000) / 5,000

= ($10,000 + $75,000) / 5,000

= $85,000 / 5,000

= $17 per unit

This means the business needs to sell each unit for at least $17 to cover all costs and start making a profit.

FAQ

What is the difference between break even point and break even price?: The break even point refers to the quantity of goods or services that must be sold to cover all costs, while the break even price is the minimum price per unit needed to achieve this.
How does pricing affect the break even price?: Higher prices can increase your break even price, meaning you need to sell fewer units to cover costs. Conversely, lower prices can decrease your break even price, requiring you to sell more units.
Can the break even price be negative?: No, the break even price cannot be negative as it represents the minimum price needed to cover costs. If your costs are negative (unlikely), you would need to adjust your cost calculations.
How often should I recalculate my break even price?: You should recalculate your break even price whenever there are significant changes in costs, production volume, or market conditions.
Is the break even price the same as the profit margin?: No, the break even price is about covering costs, while the profit margin measures the percentage of revenue that becomes profit after covering costs.