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The breakeven analysis is done by estimating the total amount that a company has to spend in the creation of a single product. This would include all the fixed costs like the cost of setting up the facility, buying machinery, etc. and the variable costs like the raw material needed to make each product, the labor costs involved for each product, the marketing expenditure required, etc.
To estimate the price that the product should be priced at, it is first essential to estimate the sales in a year and in how many years the company intends to recoup all the fixed costs.
Based on the number of products that can be sold, the breakeven price of a single product can be determined by dividing all the costs involved by the total number of products. The price of the product at which it is sold in the market has to be higher than the breakeven price so that the owners of the company can make a profit.
In addition to keeping the price of the product higher than the breakeven price, the management also has to analyze the market, the behavior of the customers buying the product, what their competitors are expected to do and the alike so that they can remain competitive in the long run and are able to increase their profits.
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