By: Michael E. Martinez

Breakeven analysis determines the minimum sales volume a product must generate at a certain price to cover all costs. This involves various costs and total revenues. Total cost is the sum of the total variable costs as well as the total fixed cost. The variable cost can change because of labor and raw materials. Fixed costs involve that of utilities such as water and electricity usually remain stable regardless of the production level.

Total revenue is determined by multiplying the price by the number of units sold. Sales that will generate enough revenue that covers all the company's fixed and variable costs is called the breakeven point. It's the point that equals total costs. Anything beyond the breakeven point is making a profit; anything below the breakeven point is considered a loss. In deciding on the breakeven analysis, marketers take several prices and determine from that if there is a profit or loss, different prices produce different results. By comparing the different prices, they have to come up with the best price but one that also would get enough customers to buy the products and make a profit for the company.

The marketers develop estimates through surveys, they talk to retailers about how they will be handling and selling the product and they also see what the competitors are doing. The breakeven points for different proposed prices are calculated and compared with estimates that were made from each price; this is known as modified breakeven analysis. A company uses its marketing strategies to come up with pricing including skimming pricing, penetration pricing, discount and competitive pricing.

The breakeven point tells the business what level of output or activity is required before the firm makes a profit. This reflects the relationships between costs, volumes and profits. Many new businesses should be patient as hitting the breakeven point may take some time, so then that business can be profitable. Strategies in determining pricing decisions to make a profit are based on economic theories, but only the level of sales will determine the actual outcome.