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In order to determine the breakeven point, you must first calculate the fixed and variable costs. To make
sure all costs are included, you may want to highlight the fixed costs in one color (e.g., green) and the
variable costs in another color (e.g., blue). Then, using the formulas below, calculate how many units the
manufacturer must sell to break even.
The formula for BEP is as follows:
BEP = total fixed costs (FC) ÷ contribution per unit (CU)
contribution per unit = MSP – variable costs (VC)
BEP = $200,000 ÷ ($15 – $7) = $200,000 ÷ $8 = 25,000 units to break even
To determine the breakeven point in dollars, you simply multiply the number of units to break even by the
MSP. In this case, the BEP in dollars would be 25,000 units times $15, or $375,000.
KEY TAKEAWAY
In addition to setting a pricing objective, a firm has to look at a number of factors before setting its prices.
These factors include the offering’s costs, the customers whose needs it is designed to meet, the external
environment—such as the competition, the economy, and government regulations—and other aspects of the
marketing mix, such as the nature of the offering, the stage of its product life cycle, and its promotion and
distribution. In international markets, firms must look at environmental factors and customers’ buying
behavior in each market. For a company to be profitable, revenues must exceed total costs.