Break-Even Price Key takeaways
The break-even price is the sale price at which total receipts equal total costs—no profit, no loss.
In business, it reflects the unit price that covers fixed and variable costs; in options, it’s the underlying price that offsets the option premium.
* Firms sometimes price at break-even to gain market share, but doing so for long periods requires capital reserves and can harm perceived value. What is a break-even price? A break-even price is the price at which selling an asset, product, or service exactly covers all associated costs. Anything above that price is profit; anything below is a loss. Explore More Resources
Examples:
Selling a house for a price that equals purchase price plus mortgage interest, taxes, insurance, improvements, closing costs, and commissions results in neither profit nor loss.
For manufacturing, it’s the per-unit price that covers both fixed and variable production costs.
* For an options contract, it’s the underlying security price at which exercising or closing the option results in a net zero gain/loss after accounting for the premium. How it works Break-even analysis identifies the minimum price or sales volume needed to avoid losses. As production volume increases, fixed costs are spread over more units, lowering the break-even price per unit (economies of scale). Traders use break-even calculations to understand the price movement needed for a trade to become profitable after fees, commissions, and taxes. Explore More Resources
Formulas Break-even point (in units)
Break-even units = Fixed costs / (Price per unit − Variable cost per unit) Break-even revenue
Break-even revenue = Fixed costs / Contribution margin ratio
* Contribution margin ratio = (Price − Variable cost) / Price Explore More Resources
Unit break-even price (per unit cost)
Unit break-even price = Variable cost per unit + Allocated fixed cost per unit Options contracts
Call option BEP = Strike price + Premium paid
* Put option BEP = Strike price − Premium paid Explore More Resources
Include taxes, commissions, and other transaction costs in any practical break-even calculation to get an accurate measure. Strategy: pricing at break-even Selling at break-even can be a deliberate strategy for market entry or gaining share when a product is not highly differentiated. Benefits and requirements:
Advantages: Attracts price-sensitive customers, can crowd out competitors, and creates entry barriers.
Risks: Requires capital to sustain periods of zero profit; may create perceptions of low quality; vulnerable to price wars that can push prices below break-even. Explore More Resources
After gaining market dominance, firms may raise prices to restore profitability once weaker competitors exit. Effects: pros and cons Pros
Rapid customer acquisition and market share growth
Potential to deter new entrants Explore More Resources
Cons
No immediate profit—requires funding for sustained operations
Can lower perceived product value
Susceptible to destructive price competition Examples Manufacturing example
A product’s variable cost per unit = $10.
If fixed costs are $200,000 and the firm plans to produce 10,000 units:
Allocated fixed cost per unit = $200,000 / 10,000 = $20
Break-even price per unit = $10 + $20 = $30
If production rises to 20,000 units, allocated fixed cost per unit falls to $10, and the break-even price becomes $20. Explore More Resources
Options example
A call option with strike $100 and premium $2.50 has a break-even of $102.50; the underlying must exceed this for a net profit.
A put option with strike $20 and premium $2 has a break-even of $18. How individuals can use break-even prices
* Home sellers can determine the minimum sale price to eliminate mortgage debt.
* Investors can calculate the underlying price an option needs to reach before a trade becomes profitable.
* Traders and businesses can plan pricing, production scale, and capital needs around break-even thresholds.
Why include taxes and fees? Taxes, commissions, and other transaction costs reduce net receipts. Ignoring them can underestimate the true break-even threshold. For long-term comparisons, consider inflation as well. Explore More Resources
Quick FAQs Q: What is the break-even price for an options contract?
A: For a call, it’s strike + premium. For a put, it’s strike − premium. Q: How do I calculate break-even units?
A: Use Fixed costs / (Price − Variable cost) to get the number of units needed to cover all costs. Explore More Resources
Q: Should I ever price at break-even?
A: It can be a tactical choice for market entry or competitive pressure, but it requires sufficient capital and a plan to restore margins later. Further reading
* Use break-even analysis alongside cash-flow planning and market research to evaluate pricing decisions and expansion plans. Explore More Resources