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 manufacturing or providing it in options trading the break even price is the price in the underlying asset at which investors can choose to exercise or dispose of the contract without incurring a loss understanding break even pricesbreak 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 purchase price interest paid on the mortgage hazard insurance property taxes maintenance improvements closing costs and real estate sales commissions at this price the homeowner 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 formulathe 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 process 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 trade 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 fixed cost and 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 gross profit margin divided by total 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 break even point bep it can be represented by the following formulas for a call or put respectively break even price strategybreak even price 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 estimate a firm s break even point the break even point is equal to the total fixed costs divided by the difference between the unit price and variable costs break even price effectsthere 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 price war pricing at break even would not be enough to help gain market control with racing to the bottom pricing losses can be incurred when break even prices give way to even lower prices both marginalist and marxist theories of the firm predict that due to competition firms will always be under pressure to sell their goods at the break even price implying no room for long run profits examples of break even pricessuppose firm abc manufactures widgets the total 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 building a factory and buying machines for manufacturing the firm s break even price for each widget can be calculated as follows 30 is the break even price for the firm to manufacture 10 000 widgets the break even price to manufacture 20 000 widgets is 20 using the same formula 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 