Answer:
Its Pretty Simple
Explanation:
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.
KEY TAKEAWAYS
A break-even price describes a change of value that corresponds to just covering one's initial investment or cost.
For an options contract, the break-even price is that level in an underlying security when it covers an option's premium.
In manufacturing, the break-even price is the price at which the cost to manufacture a product is equal to its sale price.
Break-even pricing is often used as a competitive strategy to gain market share, but a break-even price strategy can lead to the perception that a product is of low quality.
Break-Even Price Formula
The 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:
Business break-even = gross profit margin / 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:
BEP call = strike price + premium paid
BEPpu = strike price - premium paid
Break-Even Price Strategy
Break-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:
Fixed costs / (price - variable costs) = break-even point in units
The break-even point is equal to the total fixed costs divided by the difference between the unit price and variable costs.
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