The Little Book of Big Decision Models

MODEL 61

BREAKEVEN ANALYSIS: KNOWING IF YOU CAN REDUCE PRICES

Use this when your organisation has recovered all fixed costs and you want to explore lowering the price of a product.

Often a manager is faced with the problem of either reducing the price of a product and winning a large contract or refusing to reduce the price and losing out. Fortunately breakeven analysis (BEA) can provide some help. But before we get onto that it’s necessary to define some costing terms.

Fixed costs are those costs that remain the same regardless of the level of production. For example just because production goes up from 100,000 to 102,000 units doesn’t mean an increase in administrative salaries, rates, office heating and lighting, advertising or auditors, ...