Break-Even Price
Candlefocus EditorIn options contracts, the break-even price is an important calculation as it is the price of the underlying security, such as a stock, at which an option contract covers the premium that a trader paid for the option. The break-even price must be reached for a trader to make a profit, but if the price does not meet or exceed the break-even price, the amount of money lost corresponds to the amount paid for the option contract.
Break-even pricing is most commonly used in manufacturing operations. In this case, the break-even price is the sale price of a product at which the cost of production equals the amount of revenue received from sales. This cost is calculated using fixed costs, such as material and labor, and variable costs, such as overhead that can change according to how many products are made. To make a profit, the sale price of a product must be higher than the break-even price.
While calculating break-even price can be an excellent tool for assessing the cost and sale of a product, break-even pricing is often used as a competitive strategy to gain market share. This occurs when companies offer a product at a price that is equal to, or lower than, the break-even price in order to entice customers and boost sales. However, this method has its drawbacks, as it can lead to a perception that a product is of low quality. Additionally, if a company continues to offer a product at a break-even price, it will not make a profit and will eventually run into financial trouble.
Overall, break-even price is important to businesses as it helps to assess the cost and sale of products to determine the price that is needed to reach profitability. Companies may use a break-even pricing strategy to gain market share, but it must be done cautiously in order to avoid giving off the wrong perception of a product or running into a financial trouble.