Question

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A new start-up business will have fixed costs of $750,000 per year. It plans on selling one product that will have a variable cost of $20 per unit. What is the product’s selling price to break even?

Answer 1

Break even point is a level of sales at which the total sale proceeds equals the total costs and as a result the total profit would be zero.

This can be reflected as follows,

Total variable cost + total fixed cost = Total revenue (at break even point)

($20 x m) + ($750,000) = P x m

Here, let's says P be the price per unit we are required to find, and m be the price number of units.

So P = (($20 x m) + ($750,000))/m

P = $20 + $750,000/m is the equation satisfying the break even, for a given number of units we can find the price to be charged to break even.

Let's say the number of units be 1000, then the price to break even would be $20 + $750,000/1,000 = $770.