File C5-202
April 2007
www.extension.iastate.edu/agdm
Breakeven Selling Price
C
omputing the breakeven selling price for your product is an important calculation when setting your
sale price. It tells you the minimum price you can sell your product for and still cover your costs.
The breakeven sale price should be computed over a range of production and sale quantities using the
formula below.
Breakeven Sale Price =
Total Fixed Cost + Variable Cost per Unit
Volume of Production
First you need to categorize your costs into the managerial cost categories of fixed and variable. A key concept in this formula is the fixed cost per unit of sales. Because total fixed costs are constant regardless of the
volume of production, the fixed cost per unit of production drops as volume increases, as shown below.
Then divide the total fixed cost by the volume of production to calculate the fixed cost per unit of production.
Total Fixed Cost
$100
$100
$100 $100
Volume of Production
divided by
divided by
divided by
divided by
50
25
20
10
Fixed Cost per Unit
equals
equals
equals
equals
$2
$4
$5
$10
Next add the fixed cost per unit to the variable cost per unit to compute a total cost per unit. This is your
breakeven sale price.
Total Cost per Unit
Fixed Cost per Unit
Variable Cost per Unit(breakeven sale price)
$2
$4
$5
$10 plus
plus
plus
plus
$5
$5
$5
$5
equals
equals
equals
equals
$7
$9
$10
$15
The larger the number of units you produce and sell, the smaller the sale price needed to breakeven, and vice
versa. If selling price is set, profits may accrue at high volumes of production but losses occur at low volumes.
Assume that you pick a sale price of $10. Let’s examine what will happen to profits if you produce and sell a
range of different quantities of the product.
Don Hofstrand
extension value-added agriculture specialist
co-director Ag Marketing Resource Center
641-423-0844, dhof@iastate.edu
File C5-202
Page 2
Sale Price
$10
$10
$10
$10
Volume of Production
multiplied by
multiplied by
multiplied by
multiplied by
Variable Cost per unit
$5
$5
$5
$5
multiplied by
multiplied by
multiplied by
multiplied by
Total Variable Costs
$250
$125
$100
$50
$500
$250
$200
$100
equals
equals
equals
equals
50
25
20
10
equals
equals
equals
equals
$100
$100
$100
$100
equals
equals
equals
equals
Total Costs
less
less
less
less
Gross Income
$500
$250
$200
$100
Volume of Production Total Variable Costs
Total Fixed Costs
plus
plus
plus
plus
Gross Income
50
25
20
10
$350
$225
$200
$150
equals
equals
equals
equals
$250
$125
$100
$50
Total Costs
$350
$225
$200
$150
Profit/Loss
$150
$25
$0
-$50
At sales of 50 units the business generates profits of $150. However, at sales of 10 units, a loss of $50 is
incurred.