What Is a Break-Even Price?

A break-even price is the amount of money, or change in value, for which an asset must be sold to cover the costs of acquiring and owning it. It can also refer to the amount of money for which a product or service must be sold to cover the costs of manufa♒cturing or providing it.

In options trading, the break-even price is the price in the 澳洲幸运5开奖号码历史查询:underlying asset at which investors can choose to exercise or dispose of the contract withou𒁃t incurri♌ng a loss.

Understanding Break-Even Prices

Break-even prices can be applied to almost any transaction. For example, the break-even price of a house would be the sale price at which the owner could cover the home's 澳洲幸运5开奖号码历史查询:purchase price, interest paid on the mortgage, 澳洲幸运5开奖号码历史查询:hazard insurance, 澳洲幸运5开奖号码历史查询:property taxes, maintenance, improvements, 澳洲幸运5开奖号码历史查询:closing costs, and 澳洲幸运5开奖号码历史查询:real estate sales commissions. At this price, the hom𒆙eowner would not see any profit, but also would not lose any money.

Break-even price is also used in managerial economics to determine the costs of scaling a product's manufacturing capabilities. Typically, an increase in product manufacturing volumes translates to a decrease in break-even prices because costs are spread over more product quantity.

Traders also use break-even prices to understand where a securities price🙈 must go to make a trade profitable after costs, fees, and taxes have been taken into account.

Break-Even Price Formula

The break-even price is mathematically the amount of monetary receipts that equal the amount of monetary contributions. With sales matching costs, the related transaction is said to be break-even, sustaining no losses and earning no profits in the 𒊎process. To formulate the break-even price, a person simply uses the amount of the total cost of a business or financial activity as the target price to sell a product, service, or asset, or t🌠rade a financial instrument with the goal to break even.

For example, the break-even price for selling a product would be the sum of the unit's 澳洲幸运5开奖号码历史查询:fixed cost and 澳洲幸运5开奖号码历史查询:variable cost incurred to make the product. Thus if it costs $20 total to produce a good, if it sells for $20 exactly, it is the break-even price. Another way to compute the total breakeven for a firm is to take the 澳洲幸运5开奖号码历史查询:gross profit margin divided by total fixed costs:

• Business break-even = gross profit margin / fixed costs

​​For an options contract, such as a call or a put, the break-even price is that level in the underlying security that fully covers the option's premium (or cost). Also known as the 澳洲幸运5开奖号码历史查询:break-even point (🧜BEP), it can be represented by the followin🐠g formulas for a call or put, respectively:

• BEP_call = strike price + premium paid
• BEP_put = strike price - premium paid

Break-Even Price Strategy

Break-even pric🌳e as a business strategy is most common in new commercial ventures, especially if a product or service is not highly differentiated from those of competitors. By offering a relatively low break-even price without any margin markup, a business may have a better chance to gather more market share, even though this is achieved at the expense of making no profits at the time.

Being a cost leader and selling at the break-even price ♋requires a business to have the financial resources to sustain periods of zero earnings. However, after establishing market dominance, a business may begin to raise prices when weak competitors can no longer undermine its higher-pricing efforts.

The following formula can be used to 澳洲幸运5开奖号码历史查询:estimate a firm's break-even point:

• Fixed costs / (price - variable costs) = break-even point in units

The break-even point is equal to the total fixed costs divideꦬd by the difference between the unit price and variable costs.

Break-Even Price Effects

There are both♛ positive and negative effects of transacting at the break-even price. In addition to gaining market shares and driving away existing competitions, pricing at break-even also helps set an entry barrier for new competitors to enter the market. Eventually, this leads to a controlling market position, due to reduced competition.

However, a product or service's comparably low price may create the perception that the product or service may not be as valuable, which could become an obstacle to raising prices later on. In the event that others engage in a 澳洲幸运5开奖号码历史查询:price war, pricing at break-even would not be enough to help gain market control. With 澳洲幸运5开奖号码历史查询:racing-to-the-bottom pricing, losses can be𒁃 incurred wh✃en break-even prices give way to even lower prices.

Examples of Break-Even Prices

Suppose firm ABC manufactures widgets. The t❀otal costs for making a widget per unit can be broken𝄹 down as follows:

Hence, the break-even price to recover costs🐈 for ABC is $10 per widget.

Now suppose that ABC becomes ambitious and is interested in making 10,000 such widgets. To do so, it will have to scale operations and make significant capital investments in factories and labor. The firm invests $200,000 in fixed costs, including b🥂uilding a factory and buying machines ♔for manufacturing.

The firm's break-even price for each widget can be calculated as follows:

• (Fixed costs) / (number of units) + price per unit or 200,000 / 10,000 + 10 = 30

$30 is the break-even price for the firm to manufac🐓ture 10,000 widgets. The break-even price to manufacture 20,000 widgets is $20 using the same formula.

Ex🌠ample: Break-E💫ven Price for an Options Contract

For a ⭕call option with a strike price of $100 and a premium paid of $2.50, the break-even price that the stock would have to get to is $102.50; anything above that level would be pure profit, anything below would imply a net loss.