Break-even Analysis and Target Profit Pricing

Another cost-oriented pricing schema is break-even pricing (or a variation called target profit pricing him firm tries to find out the price at which it shall break even or make the target profit it is seeking. This pricing method is also utilized by public utilities, which are forced to make a fair return on their investment.

Target pricing utilized the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels. Given figure shows a break-even point. Fixed costs are similar regardless of sales volume. Variable expenses are added to fixed costs to form entire costs, which go up with volume. The total revenue curve begins at zero and goes up with each unit sold.

 Fixed Cost

Break-even Volume =

Price - Variable Cost

The manufacturer should consider different prices and estimate break-even volumes, probable demand, and profits for each.