Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic

Marketing: A

Global−Managerial

Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

526 Chapter 18

item). When we divide this per-unit contribution into the total fixed costs that must

be covered, we have the BEP (in units).

To illustrate the formula, let’s use the cost and price information in Exhibit 18-8.

The price per unit is $1.20. The average variable cost per unit is 80 cents. So the

FC contribution per unit is 40 cents ($1.2080 cents). The total fixed cost is

$30,000 (see Exhibit 18-8). Substituting in the formula:

BEP 

$30,000

.40 
75,000 units

From this you can see that if this firm sells 75,000 units, it will exactly cover all

its fixed and variable costs. If it sells even one more unit, it will begin to show a

profit—in this case, 40 cents per unit. Note that once the fixed costs are covered,

the part of revenue formerly going to cover fixed costs is now all profit.

The BEP can also be figured in dollars. The easiest way is to compute the BEP

in units and then multiply by the assumed per-unit price. If you multiply the sell-

ing price ($1.20) by the BEP in units (75,000) you get $90,000—the BEP in dollars.

Often it’s useful to compute the break-even point for each of several possible

prices and then compare the BEP for each price to likely demand at that price. The

marketing manager can quickly reject some price possibilities when the expected

quantity demanded at a given price is way below the break-even point for that price.

So far in our discussion of BEP we’ve focused on the quantity at which total rev-

enue equals total cost—where profit is zero. We can also vary this approach to see what

quantity is required to earn a certain level of profit. The analysis is the same as described

above for the break-even point in units, but the amount of target profit is added to the

total fixed cost. Then when we divide the total fixed cost plus profit figure by the

contribution from each unit, we get the quantity that will earn the target profit.

Break-even analysis makes it clear why managers must constantly look for effec-

tive new ways to get jobs done at lower costs. For example, if a manager can reduce

the firm’s total fixed costs—perhaps by using computer systems to cut out excess

BEP can be stated in
dollars too

Each possible price
has its own break-even
point

A target profit can be
included

Break-even analysis

shows the effect of

cutting costs

The money that a firm spends on
marketing and other expenses
must be at least covered by a
firm’s price if it is to make a
profit. That’s why Gillette enjoys
big economies of scale by selling
the same razors in every market.