Explain what is break-even pricing method in Pricing Decisions ( Part 4

October 15th, 2006 Comments off
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In the earlier article, we have dealt with the importance of making the correct pricing decisions and the factors to consider before making a pricing decision.

This article refers to the various methods of pricing which include the following:

  • Full Cost Plus pricing;
  • Variable/Marginal Cost Plus pricing
  • Rate of Return Pricing;
  • Break-even Pricing;
  • Minimum Pricing;
  • Standard Cost Plus

Salient Points on Break-Even Pricing:
  • For this type of pricing, the price at which the products will break-even is used. This break-even price will then be added a profit mark up.

Simple Illustration:

Fixed Cost $25,000

Variable cost $2.00 per unit

Number of Units produced 4,000

Mark-up is 15% on the break-even price

What will be selling price to the customers?

Solution:

Break-even price

= Fixed Cost + Variable cost/marginal cost

Total Number of units produced

= $25,000+ $8,000

4,000

= $8.25

+ mark up of 15% ($1.24)

=$9.50 which is the selling price to the customer.

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