## Introduction

Regardless of the pricing strategy a company ultimately selects, it is important to do a break-even analysis beforehand. Marketers need to understand break-even analysis because it helps them choose the best pricing strategy and make smart decisions about the short- and long-term profitability of the product.

The break-even price is the price that will produce enough revenue to cover all costs at a given level of production. At the break-even point, there is neither profit nor loss. A company may choose to price its product below the break-even point, but we'll discuss the different pricing strategies that might favor this option later in the module.

## Understanding Breakeven

Let's begin with a very simple calculation of breakeven and build from there.

Now you need to buy ingredients for the cookies. Once you add up the food costs of making a single large batch of cookies, you find that it's a total of $7.20 for a batch of 12 dozen (144) cookies. If you divide that out, you can tell that each cookie costs$.05 in food costs ($7.20 / 144 cookies =$.05). In other words, every cookie you sell is going to have a variable cost of $.05. Variable costs do change as production is increased or decreased. Adding these different types of costs makes the break-even equation more complicated, as shown below: pn = Vn + FC p = price n = number of units sold V = variable cost per unit FC = fixed costs With this equation we can calculate either the break-even price or the break-even quantity. ### Calculating Break-Even Price Chances are good that you can only bake a certain number of cookies each week—let's say it's 2,500 cookies—so, based on that information, you can calculate the break-even price. The formula to do that is the following: p = (Vn + FC) / n n = 2,500 V =$.05

FC = $500 Therefore, p = (($.05 x 2,500)  + $500) / 2,500 p = ($125 + $500) / 2,500 p =$.25

Your break-even price for your cookies is 25 cents. That doesn't mean it's the right market price for the cookies; nor does it mean that you can definitely sell 2,500 cookies at whatever price you choose. It simply gives you good information about the price and quantity at which you will cover all your costs.

### Calculating Break-Even Quantity

Now let's assume that you have set your price and you need to know your break-even quantity. You are an exceptional marketing student, so you have talked to the people who are likely buyers for your cookies, and you understand what price is a bargain and what price is too expensive. You have compared the price with competitor prices. And, you have considered the price of your cookie compared to the price of doughnuts and ice cream (both are "substitutes" for your product). All of this analysis has led you to set a price of $2 per cookie, but you want to make sure that you don't lose money on your business: You need to calculate the break-even quantity. The formula to do that is the following: n = FC /( p - V) Using the same inputs for the variables, your equation looks like this: n =$500 / ($2 -$.05)

n = $500 /$1.95