Set shared prerequisites before comparing prices
- One product or service unit and one planning period. (not complete)
- Variable cost per unit on a declared indirect-tax basis. (not complete)
- Period fixed costs inside the selected decision boundary. (not complete)
- Assumed units for that same period, labelled as an assumption. (not complete)
- A separately named return layer: period target return or percentage margin. (not complete)
Compare both boundaries symmetrically
| Criterion | Break-even price | Target-return price |
|---|---|---|
| Question | What unit price covers declared variable and period fixed costs? | What unit price also includes the selected period return? |
| Inputs | Variable cost, period fixed cost and assumed units | The same inputs plus a named target return |
| Denominator | Assumed units for the period | The same assumed units for the period |
| Output | Zero-target-return boundary per unit | Selected target-return boundary per unit |
| Useful use | Expose minimum cost recovery under the scenario | Expose the extra price or volume required for a named return |
| Failure mode | Mistaken for a viable or profitable market price | Target layer is undefined or treated as guaranteed |
| Validation evidence | Reconciled costs, units and period | The same reconciliation plus documented return objective |
Worked scenario: same costs and volume, different return condition
Figures are neutral user assumptions before indirect tax. Fixed cost and target return are per period; price and variable cost are per unit.
break-even price = variable cost per unit + period fixed costs / assumed units
- variable cost per unit
- Cost that changes with one unit (currency units per unit) — business record or user input
- period fixed costs
- Declared fixed-cost boundary for the selected period (currency units per period) — business record or user input
- assumed units
- User scenario volume for the same period (units per period) — user assumption
target-return price = variable cost per unit + (period fixed costs + target period return) / assumed units
- variable cost per unit
- The same variable cost used in the break-even case (currency units per unit) — business record or user input
- period fixed costs
- The same fixed-cost boundary used in the break-even case (currency units per period) — business record or user input
- target period return
- Additional return selected for this scenario (currency units per period) — user assumption
- assumed units
- The same user scenario volume used in both cases (units per period) — user assumption
| Measure | 100-unit case | 80-unit case |
|---|---|---|
| Variable cost per unit | 30 | 30 |
| Period fixed costs | 2,000 | 2,000 |
| Target period return | 1,000 | 1,000 |
| Break-even price per unit | 50 | 55 |
| Target-return price per unit | 60 | 67.50 |
At 100 units, 30 + 2,000 ÷ 100 = 50 to break even, while 30 + (2,000 + 1,000) ÷ 100 = 60 for the target return. At 80 units, the corresponding boundaries are 55 and 67.50.
Use each boundary without declaring a winner
| Boundary | Useful when | Trade-off | Stop point |
|---|---|---|---|
| Break-even | Testing whether declared costs can be recovered | Includes no target return | Required price or volume is not commercially feasible |
| Target return | Testing an explicit period return objective | Depends on both target definition and assumed volume | The target is undefined or the scenario lacks market and capacity support |
Break-even and target-return questions
- Does a break-even price include profit?
- It includes zero target return on the declared boundary. It covers the selected variable and fixed costs at the assumed volume, but not an additional target return.
- Why does the price change when assumed volume changes?
- Fixed costs and any target period return are spread across the assumed units. Fewer units make the allocated amount per unit larger.
- Is target return the same as target gross margin?
- Not automatically. A target period amount and a percentage margin use different definitions and algebra. Name the profit layer before choosing the matching method.
Methods used
- Calculate a Break-Even Point in Units and Dollars — OpenStax: Break-even and target-income distinction; no demand forecast.
- Break-even Sales methodology — Margin101
- Target Margin & Pricing methodology — Margin101