Break-even Pricing, Revenue and Units

Editor’s note
See the Break-even Analysis Tool (XLSX) for related information. Google Sheets version will be available soon.

Mallory Rahe
Associate Extension Professor, Agricultural Business and Policy

Ryan Milhollin
Associate Extension Professor, Agricultural Business and Policy

For a value-added agricultural business, breakeven pricing helps determine an appropriate selling price for a product. When a product’s market-accepted sales price exceeds its break-even price, the business can be more confident that the product is financially viable. This guide explains how to calculate a value-added agricultural product’s break-even price, required revenue and unit sales from a cost perspective, and how to use the Break-even Analysis Tool to evaluate financial feasibility.

Understanding your break-even point is also important when producing agricultural commodities. However, commodity producers are price-takers, not price-makers, meaning market forces largely determine the prices they receive. In contrast, producer-owned value-added businesses have greater influence over pricing decisions. As a result, they can better estimate a product’s sales price and decide whether the difference between the sales price and determine whether the margin between the expected sales price and the break-even price provides an acceptable return on investment and compensates for the risks associated with production.

MU Extension developed a Break-even Analysis Tool that enables value-added businesses to estimate break-even thresholds, evaluate throughput, and make better informed operational decisions. The tool is available as both a Microsoft Excel workbook and a Google Sheets file.

Variable and fixed costs

Value-added agricultural business owners evaluate a product’s financial viability by estimating production costs, setting a competitive sales price based on comparable products, and determining whether the product can be produced profitably at that price.

Typically, value-added businesses incur two types of production costs: variable and fixed.

• Variable costs change directly in proportion to production volume changes. In other words, a one-unit increase in production would mean a one-unit increase in variable costs. Examples include the costs of direct materials or supplies used to make a product, shipping charges and part-time employee wages.
• Fixed costs are not affected by production volume changes. They stay the same even if production volume increases or decreases. Examples include rent, interest on debt, insurance, equipment, professional fees and full-time employee salaries.

Treating capital as a fixed or variable cost

When producing multiple products, it is essential to allocate fixed costs accurately. In the following example, the business makes only one product, so all of the commercial kitchen rent, marketing and utility costs are treated as fixed costs.

As a business expands into multiple product lines, a more effective approach is to allocate fixed costs to individual products or product lines and analyze breakeven units, revenue and sales for products with similar resource requirements, such as square footage, utilities, repair, marketing, fees and insurance.

Allocating equipment costs to the products they produce as variable costs helps evaluate buy-versus-rent decisions and identify when increased production volume justifies replacing labor hours with equipment-based production.

When a business substantially increases its production output, its cost structure may change. Variable costs per unit may decrease if the business can purchase larger volumes of inputs and receive quantity discounts. At the same time, increased production may require additional property or equipment, resulting in higher total fixed costs. For illustrative purposes, however, the examples in this publication assume that variable costs per unit and total fixed costs remain unchanged. Under these assumptions, the publication also demonstrates how to assign equipment costs to individual products.

Estimating your cost of production

The first step in estimating production costs is to identify the business’s variable and fixed costs.

To calculate variable production costs, produce a full batch of your product and record all costs associated with that batch, including raw materials and packaging. After production is complete, calculate the cost per unit for each input using the input-output ratio. As shown in Table 1, the input-output ratio is determined by dividing the quantity of each input used by the total number of units produced.

Table 1. Estimating the variable costs for a bottle of elderberry syrup made by Elderberry Emporium.

Next, calculate production labor costs for the batch. Record all labor hours required from gathering raw ingredients through placing finished products into inventory. Divide the total labor hours by the number of units produced to determine the hours per unit. Multiply this by the applicable hourly wage rate to determine the labor cost per unit.

Finally, estimate the cost of operating equipment to produce one batch. Start by calculating the estimated equipment cost per hour. This cost is a sum of the hourly depreciation, repair and operating costs. Record the number of hours a piece of equipment runs to produce a single batch. Divide this number by the units produced in a batch to know the total equipment time per unit. Multiply this value by the hourly equipment cost to calculate the equipment cost per unit.

The variable cost per unit is the sum of the per-unit material, packaging, production labor and equipment costs.

After calculating variable costs, identify and allocate fixed costs. Fixed costs are expenses that remain relatively unchanged regardless of production volume. Examples include rent, utilities, salaries, insurance and equipment ownership costs.

When estimating fixed costs, avoid double counting expenses that have already been allocated as variable costs. The fixed-cost table in the Break-even Analysis Tool includes marketing expenses. Businesses seeking a more detailed analysis of the cost of entering and acquiring a customer by market channel should leave the fixed cost marketing entry blank and use MU Extension publication G647, Market Channel Cost Assessment Tool, to develop product specific marketing cost projections.

If fixed costs are shared among multiple enterprises, allocate only the appropriate share of those expenses to the enterprise being evaluated.

Cost of production example

The following example uses Elderberry Emporium, a fictitious value-added business that produces elderberry syrup from frozen elderberries and sells it in 8-ounce glass bottles. The example shows how to develop break-even point assumptions and calculate a product’s break-even price.

Estimating variable costs of production

Elderberry Emporium makes 12 8-ounce bottles of elderberry syrup in a typical batch. The batch recipe uses 24 cups of frozen elderberries, 3 cups of honey and 4 tablespoons of spices. Because the business buys elderberries by the pound, honey by the gallon, and spices by the ounce, several unit conversions are required. These conversions allow the business to determine the quantity and cost of each ingredient used in a batch and, ultimately, to calculate the ingredient cost for a single bottle of syrup.

Frozen elderberries input-output ratio
24 cups of frozen elderberries weigh 7.67 pounds.

7.67 pounds ÷ 12 bottles = 0.64 pounds per bottle

Frozen elderberries variable cost
Frozen elderberries are purchased for $3.50 a pound.

$3.50 × 0.64 = $2.24 of elderberries per bottle

For some units, like honey in this example, you may also need to divide the input used for each unit sold by the total amount of that input typically purchased at one time.

Honey input-output ratio
3 cups of honey weigh 35.55 ounces. There are 16 ounces in a gallon.

35.55 ounces ÷ 16 ounces = 2.22 gallons

2.22 gallons ÷ 12 bottles = 0.185 gallons per bottle

Honey variable cost
Honey is purchased for $9.75 a gallon.

$9.75 × 0.185 = $1.80 of honey per bottle

Spice input-output ratio
4 tablespoons of spice weigh 27.24 grams. There are 28.35 grams of dried spice in an ounce.

27.24 grams ÷ 28.35 grams in an ounce = 0.96 ounces in a batch

0.96 ounces ÷ 12 bottles = 0.08 ounces of dried spice per bottle

Spices variable cost
Spices are purchased for $3 an ounce.

$3 × 0.08 = $0.24 of spices per bottle of syrup

The business can determine the per-unit cost of bottles, lids and labels by dividing the total purchase cost by the quantity purchased. A miscellaneous category can account for cleaning supplies. Based on the assumptions in Table 1, the bottle, label and miscellaneous costs total $1.70 per bottle of syrup.

Once the variable costs of inputs have been calculated, the next step is to estimate labor cost. At Elderberry Emporium, producing one batch of 12 sealed and labeled bottles takes about 88 minutes, measured from the time washed and destemmed frozen berries are removed from storage until the finished bottles are placed in a crate for transport to the farmers market. Production is performed by a part-time employee who is paid $18 per hour.

Labor input-output ratio
88 minutes to produce a batch ÷ 60 minutes in an hour = 1.46 hours to make a batch

1.46 hours to make a batch ÷ 12 bottles in a batch = 0.12 hours per bottle.

Labor variable cost
Workers are paid $18 an hour.

0.12 × $18 = $2.16 of labor per bottle

Finally, the business must account for the cost of operating its equipment. Producing elderberry syrup requires the use of an industrial juicer used only for this product. To estimate the juicer’s operating costs (Table 2), the business begins with the machine’s purchase price and expected lifespan. The owner expects the juicer to have a salvage value of $100 at the end of its lifespan. The machine is expected to operate 200 hours a year and to incur $100 in annual repair and maintenance costs. While operating, the juicer draws 2 kilowatts (kW) of power per hour, and electricity costs $0.16 per kilowatt-hour (kWh). If the commercial kitchen’s hourly fees includes utilities, these costs can be ignored. The business can now calculate an estimated operating cost per hour.

Table 2. Estimating variable costs for operating a piece of equipment (industrial juicer).

Equipment cost per hour
= hourly depreciation + hourly repair cost + hourly operating costs

Hourly depreciation = (purchase price − salvage value) ÷ (lifespan × annual use) ($11,900 − $100) ÷ (15 years × 200 hours)

Hourly repair cost = annual repair cost ÷ annual use $100 ÷ 200 hours

Hourly operating costs = electricity hourly use × electricity hourly rate 2 kW × $0.16 per kWh

($11,900 − $100) ÷ (15 × 200) + ($100 ÷ 200) + (2 × $0.16) = $4.75 hourly equipment cost

Knowing the juicer runs for 45 minutes per batch, the equipment cost input-output ratio can then be calculated to estimate the costs of operating the industrial juicer to produce one bottle of elderberry syrup.

Equipment cost input-output ratio
45 minutes to produce a batch ÷ 60 minutes in an hour = 0.75 hours per batch

0.75 hours per batch ÷ 12 bottles in a batch = 0.0625 hours per bottle

Equipment variable cost
Hourly equipment cost is $4.75 an hour.

0.0625 hours per bottle × $4.75 per hour equipment cost = $0.30 in equipment costs per bottle

Based on the assumptions in Tables 1 and 2, the per-unit variable costs are $8.44.

Estimating annual fixed costs

Elderberry Emporium estimates its annual fixed costs for the categories listed in Table 3. The business operates from a rented commercial kitchen but uses its own equipment, pots and other production tools. Shelf-stable syrup bottles are stored at the owner’s home in milk crates.

Table 3. Estimating total annual fixed costs for Elderberry Emporium.

Based on the assumptions in Table 3, the total annual fixed costs are estimated at $12,682.

Forecasting expected sales

Estimating variable and fixed costs is only one step in determining a break-even price. A value-added business must also project the number of units it expects to sell. Forecasting sales can be challenging because businesses often overestimate demand. When sales fall short of projections, fixed costs are spread across fewer units, increasing the actual cost per unit. As a result, many producer-owners compensate by accepting lower wages or using income from other sources to support the business.

One practical way to develop a sales forecast is to start with your largest marketing channel and estimate average sales during a given period. For example, if you sell at a farmers market, estimate how many products you typically sell per hour. Multiply that number by the total number of hours you plan to sell at farmers markets during the season to estimate total sales.

Alternatively, suppose you expect to sell 10,000 bottles at farmers markets during a season. If the season consists of 20 market days and four selling hours per day, you would need to sell 125 bottles per hour, or more than two bottles per minute. This sales rate may not be realistic. Calculating the required sales pace can help you evaluate whether your forecast is achievable and adjust your business plan accordingly.

Elderberry Emporium projects selling 2,000 units of bottled elderberry syrup at farmers markets next year.

Finding the break-even price

With assumptions in place, use the following equation to calculate the break-even price. Using numbers from the Elderberry Emporium example, the break-even price is $14.78 per bottle, given the per-unit variable costs of $8.44, fixed costs of $12,682 and sales of 2,000 units.

Break-even price
= variable cost per unit + (total fixed cost ÷ projected unit sales)

$8.44 + ($12,682 ÷ 2,000) = $14.78 break-even price

Table 4 presents a sensitivity analysis showing how the break-even price changes under different unit sales projections. The results show that if Elderberry Emporium sells 2,000 bottles, it must charge $14.78 per bottle to cover all fixed and variable costs. This information is valuable for pricing strategy because it demonstrates how the required break-even price varies with expected sales volume, helping management evaluate pricing and sales targets simultaneously.

Table 4. Sensitivity of break-even price to changes in annual projected unit sales.

If actual sales reach only 1,500 bottles, the breakeven price increases to $16.89 per bottle. Therefore, selling 1,500 bottles at the projected price of $14.78 rather than the required $16.89 would reduce revenue by $3,165 (1,500 × $2.11). This result demonstrates the sensitivity of break-even pricing to changes in sales volume and illustrates how relatively small deviations from projected sales can have a significant impact on profitability.

Using break-even price to set a product’s price

After a business determines a product’s break-even price, it must develop a markup pricing strategy. The markup added to the break-even price should reflect customer demand, market conditions and the business’s profit objectives. To establish an appropriate selling price, a value-added agricultural business should conduct market research and compare the prices of competing or substitute products. Once producerowners have established a selling price, they can calculate the revenue and sales volume needed to cover costs and meet profit targets.

Projecting break-even revenue

Break-even revenue is the amount of revenue a business must generate to cover all costs, resulting in neither a profit nor a loss. To calculate break-even revenue, a value-added agricultural business needs to know its product’s selling price, variable costs and fixed costs.

In the following example, Elderberry Emporium sells 2,000 bottles of elderberry syrup. Variable costs are $8.44 per bottle, fixed costs total $12,682, and the selling price is $16 per bottle.

Break-even revenue
= fixed costs ÷ [1 – (variable cost per unit ÷ selling price per unit)]

$12,682 ÷ [1 – ($8.44 ÷ $16)] = $26,840

Elderberry Emporium must earn $26,840 in annual revenue to reach its break-even point. If the business lowers its projected selling price to $14 per bottle, it must earn $31,933 in annual revenue to reach its break-even point. Table 5 presents a sensitivity analysis indicating that reductions in sales price increase the revenue required to achieve break-even, highlighting the business’s vulnerability to pricing changes.

Table 5. Sensitivity of needed break-even revenue as sales price change.

Forecasting break-even sales units

To determine the number of units a business must sell to cover all costs without earning a profit or incurring a loss, the owner can perform a break-even analysis. This analysis considers a product’s selling price, variable costs and fixed costs. Information about the prices of substitute goods can also help businesses establish a competitive selling price, which directly affects the break-even point.

Assuming Elderberry Emporium’s variable cost per bottle is $8.44, annual fixed costs are $12,682 and the selling price is $16 per bottle, the break-even point can be calculated using the following formula:

Break-even point (units)
= fixed costs ÷ (selling price per unit − variable cost per unit)

$12,682 ÷ ($16 − $8.44) = 1,678 units

Elderberry Emporium would need to sell 1,678 units annually to break even.

Table 6 presents a sensitivity analysis of break-even units at alternative selling prices. If Elderberry Emporium increases its selling price to $18 per unit, it would need to sell 1,327 units annually to break even. Conversely, if the price is reduced to $14 per unit, the company would need to sell 2,281 units to cover its costs. This analysis demonstrates the significant impact of pricing decisions on profitability. In this scenario, reducing the price by $4 increases the break-even volume by 72 percent or 954 units, highlighting how a lower contribution margin requires substantially higher sales to achieve profitability.

Table 6. Sensitivity of break-even sales units to changes in selling price.

Keys to break-even estimations

To establish break-even revenue, units sold and pricing, a value-added agricultural business must understand its production costs, including labor hours. As noted earlier, production costs change over time due to equipment investments, fluctuations in input supplies, labor changes and operational efficiencies.

The MU Extension Break-even Analysis Tool, available as both a Microsoft Excel workbook and a Google Sheets file can be accessed to support value-added businesses. The tool allows users to estimate variable and fixed costs for up to 10 products and evaluate break-even points as well as sensitivity to changes in sales volume and pricing.

Within the tool, equipment operating costs can be calculated separately and assigned to the appropriate product as variable costs. Alternatively, maintenance, repair, depreciation and interest expenses associated with equipment and other capital investments can be entered in the fixed-cost table.

The analysis tool allocates fixed costs based on each product’s contribution to total business sales. This approach works well when products are sold at different price points and use capital investments and other fixed-cost resources in proportion to their sales revenue. However, when resource use varies significantly among products, this method can overallocate fixed costs to the business’s core product line (most frequently sold item) and effectively subsidize resource-intensive products sold in smaller units.

As described in the single-product example above, another approach is to allocate fixed costs proportionately across all units sold by the business. Although simpler, this method can distort breakeven and profitability analyses when products require different levels of production resources or command different retail prices. In such cases, high-units-sold, low-margin products may be assigned the same fixed costs as low-units-sold, high-margin products, creating a misleading picture of profitability.

Producer-owned value-added businesses face a unique challenge because owners must manage both the farm business and the value-added enterprise. As a result, allocating costs accurately between the two businesses can be difficult. Whenever possible, the value-added business should pay or allocate market prices rather than production costs for inputs purchased from the farm business. In this example, Elderberry Emporium purchases elderberries and honey from the farm business at the same bulk wholesale prices offered to other customers. Careful cost allocation, financial management and long-term planning can help ensure the success of both businesses.

Sensitivity analysis

A sensitivity analysis table, such as Table 7 and the sensitivity sheet in the analysis tool, helps estimate how projected net income changes under different production cost and sales scenarios. This analysis enables the business owner to identify potential bestand worst-case outcomes and assess the financial risks associated with changing market conditions.

Table 7. Sensitivity analysis for Elderberry Emporium’s projected net income from selling elderberry syrup.

At its current production scale, Elderberry Emporium operates with relatively thin profit margins. The business is projected to earn an annual profit of $2,436 if it sells 2,000 units at a price of $16 per unit. However, profitability is highly sensitive to changes in revenue. The business is projected to incur losses if sales volume declines by 20% or if selling prices decrease by 10%. Given this narrow margin for error, management may wish to evaluate opportunities to reduce production costs, improve operational efficiency, or increase sales volume by at least 20% to strengthen profitability and improve long-term financial sustainability.

This work is supported by the U.S. Department of Agriculture’s (USDA) Agricultural Marketing Service through the Resilient Food Systems Infrastructure Program grant to the Missouri Department of Agriculture. Its contents are solely the responsibility of the authors and do not necessarily represent the official views of the USDA.

Original authors: Joe Parcell, Nancy Giddens and Melvin Brees.