{"id":12965,"date":"2023-09-27T16:18:00","date_gmt":"2023-09-27T16:18:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=12965"},"modified":"2023-10-31T18:58:53","modified_gmt":"2023-10-31T18:58:53","slug":"break-even-price","status":"publish","type":"post","link":"https:\/\/businessyield.com\/bs-markets\/break-even-price\/","title":{"rendered":"BREAK-EVEN PRICE: What is Break Even Piont In Accounting?","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

The most critical profit-making strategy of every business<\/a> is in knowing the break-even relationship between different prices and sales volumes.<\/p>\n\n\n\n

Do you know what price it takes to break even in your business?<\/p>\n\n\n\n

In this article, you will learn what Break-Even Price is, the pricing strategy, and how you can apply it to your business. <\/p>\n\n\n\n

What is Break-Even Price?<\/span><\/h2>\n\n\n\n

The equilibrium or break-even price is the amount of money or change in value that an asset must be sold for in order to cover the cost of acquiring and owning the asset. It can also refer to the amount of money that a product or service needs to be sold for to cover manufacturing or delivery costs. In options trading, the break-even price is the share price at which investors can exercise or sell the contract without suffering a loss.<\/p>\n\n\n\n

Break-even<\/strong> Price Formula Economics<\/strong><\/span><\/h2>\n\n\n\n

The break-even price is mathematically the amount of monetary income that corresponds to the number of monetary contributions. In terms of sales adjustment costs, the related transaction should be in equilibrium\u2014no loss and no profit.<\/p>\n\n\n\n

To formulate the break-even price, a person simply uses the amount of the total cost of a business or financial activity as a target price to sell a product, service, or asset, or to trade a financial instrument to achieve equilibrium. For example, the equilibrium price to sell a product would be the sum of the fixed cost of the unit and the variable cost of making the product<\/p>\n\n\n\n

In an options contract such as a call or put option, the equilibrium price is equal to the level of the underlying security that fully covers the premium (or cost) of the option. Also known as Breakeven Point (BEP), it can be represented by the following formulas for a call or a sale:<\/p>\n\n\n\n

BEPcall<\/sub> = strike price + premium paid<\/p>\n\n\n\n

BEPput<\/sub> = strike price – premium paid<\/p>\n\n\n\n

Break-Even Pricing Strategy<\/span><\/h2>\n\n\n\n

Using equilibrium price as a business strategy is more common with new business, especially when a product or service does not differ materially from the competition. By offering a relatively low equilibrium price with no profit margin, a company may have a better chance of gaining more market share, even if it does so at the expense of a profit not then made.<\/p>\n\n\n\n

To be a cost leader and sell at breakeven, a company must have the financial resources to sustain periods of no profit. However, once dominance is established, a company can begin to raise prices if weak competitors can no longer undermine its higher-price efforts.<\/p>\n\n\n\n

 According to Investopedia<\/a>, the following formula is used to calculate a company’s breakeven point:<\/p>\n\n\n\n

Fixed costs \/ (price – variable costs) = break-even point in units<\/p>\n\n\n\n

The breakeven point is the total fixed costs divided by the difference between the unit price and the variable costs.<\/p>\n\n\n\n

Advantages of Break-Even Pricing<\/span><\/h2>\n\n\n\n

By understanding the relationship between sales volume and pricing, marketers can plan pricing strategies and advertising campaigns. Equilibrium analysis shows the impact of changes in price and revenue on earnings, according to the University of Michigan.<\/p>\n\n\n\n

When fixed costs increase, the break-even price analysis shows how much you need to increase sales volume or prices to offset the increased costs. It is important to do this balance sheet analysis in order for a business to run smoothly.<\/p>\n\n\n\n

Calculating the break-even prices for different sales volumes provides valuable information about the profitability of individual products and sales strategies. In a highly competitive market, break-even prices can be used to discourage new entrants and to drive existing competitors out of the market.<\/p>\n\n\n\n

Break-Even Price Effects<\/span><\/h2>\n\n\n\n

There are both positive and negative effects of trading at an equilibrium price. Breakeven prices not only gain market share and displace existing competition, but also help to create a market entry barrier for new competitors. This ultimately leads to a controlling position in the market due to reduced competition.<\/p>\n\n\n\n

However, the comparatively low price of a product or service can create the perception that the product or service may not be that valuable, which could later become an obstacle to price increases. In the event that others are involved in a price war, even pricing would not be enough to gain control of the market. In the case of downward prices, losses can arise when the equilibrium prices give way to even lower prices.<\/p>\n\n\n\n

Break-Even Point In Accounting<\/span><\/h2>\n\n\n\n

Break-Even Point (BEP) is an accounting term that refers to the situation when a company’s income and expenses were the same over a given accounting period. This means that there were no net profits or losses for the company: it was “balanced”. BEP can also refer to the income that must be generated to offset expenses incurred over a period of time.<\/p>\n\n\n\n

Break-Even Point for Accounting Vs Financial Break-Even Point<\/span><\/h2>\n\n\n\n

There are several differences between the breakeven point of accounting<\/a> and the breakeven point of the financial balance sheet.<\/p>\n\n\n\n

The breakeven point in accounting is on the one hand the simplest and most common method for analyzing results. It’s easy to calculate by taking the total cost of a given production and calculating how many units of the product must be sold to cover the cost.<\/p>\n\n\n\n

The financial break-even point, on the other hand, is more difficult to measure because different measures are applied despite the fact that it is the same concept. It does not refer to a specific product or a specific number of units, but rather to a company’s earnings, specifically how much it has to earn in order for earnings per share to be zero. Profit is the gross amount the company earns before taxes and expenses are deducted.<\/p>\n\n\n\n

Factors that Increase a Company’s Break-even Point<\/span><\/h2>\n\n\n\n

It is important to calculate a company’s breakeven point in order to know its minimum target to cover its production costs. However, there are times when the BEP increases or decreases depending on certain factors. Here are some of the factors:<\/p>\n\n\n\n