Introduction
A break-even price refers to the price point at which an investor or trader is neither at a profit nor at a loss. Technically, at the break-even-price, the trader has covered up for all costs, including the cost of the investment. In business, at the break-even-point, a company is able to meet all the costs incurred in the production of goods or services. Any amount realised above the break-even-price is profit.
Understanding Break-Even Price
In stock market transactions, a break-even-price is that at which a trader or investor is neutral to the price, and may choose to sell to recover their costs. A trader does not incur a loss by selling at the break-even-price. The break-even point can be for any transaction or any investment or business.
For example, in the case of a real estate property, the base sale price gets fixed after considering all the costs of the seller, such as cost of the house, interest paid on the loan, home insurance, municipal taxes, cost of any improvements since purchase, and commission cost for sale. The base price is the minimum break-even-price covering all costs.
Mathematically, the formula for determining the break-even price is the aggregate monetary receipts or sale value minus the costs of investment or production. The break-even-price is at the point where the sale value or receipts match the total costs. In general, the total cost of the production or investment forms the base to fix the break-even-price.
Managerial economists also use the break-even price formula to determine the incremental costs for incremental production. The evaluation helps a business to mathematically fix the capacity expansion plans. The business will know the incremental costs associated with the incremental capacity and can accordingly fix the sale price.
Conclusion
Businesses and traders alike use the break-even price as a strategy to evaluate the selling price, vis-a-vis the costs of production or investment. The strategy helps in evaluating new businesses or expansion plans. In stock trading and options trading, while booking a call or put, a trader determines the break-even-price with a view to cover costs and option premium.
