Friday, August 12, 2011

What is Break-Even Pricing?

In managerial accounting, break even pricing extends the use of marginal cost principle that is frequently used.  Break-even pricing is based on the study of break even analysis to determine the effect on profits of small changes in cost as a result of changes in the manufacturing volume of a company.

The level of sales at which there is no profit, also referred to as no loss, is called the break-even point for this type of analysis. At this point, the firm is able to recover all its costs (fixed costs and variable costs) at this level of production. Thus, when an company has achieved its breakeven level, it would be able to immediately increase its profits if it accepts extra orders at a price which is at least equal to the marginal cost per unit of additional production.

Breakeven point (BEP) can be calculated by using the following formula: 

  • BEP (units) = Total fixed costs/contribution per unit 
  • Contribution per unit (CPU) = Selling price - variable cost per unit 
  • Breakeven level of sales in value = BEP (units) * selling price per unit

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