Break even pricing extends the use of marginal cost principle. It is based on the study of break even analysis to determine the effect on profits of changes in cost as a result of changes in the volume/output of the firm. The level of sales at which there is no profit, no loss is called the break-even point. The firm is able to recover all its costs (fixed and variable) at this level of output or sales. Thus, when an export firm has achieved its breakeven level, it would be able to increase its profits if it accepts an export order at a price which is at least equal to the marginal cost per unit of additional production.
image source: danielsdailyreader.files.wordpress.com/2015/03/pricing_logo.jpg%3Fw%3D1038%26h%3D576%26crop%3D1
-
Breakeven point(BEP) can be calculated by using the following formula:
-
BEP (in units) = Total fixed costs/contribution per unit
-
Contribution per unit = Selling price minus variable cost per unit
-
Breakeven level of sales in value = BEP (in units)* selling price per unit.