When conducting break-even analysis, what should prices at minimum cover?

In break-even analysis, the primary objective is to determine the point at which total revenues equal total costs, meaning the business is neither making a profit nor incurring a loss. For a business to effectively reach this break-even point, the pricing strategy should ensure that revenues cover both fixed and variable costs.

Fixed costs are the ongoing expenses that do not change with production levels, such as salaries, rent, and insurance. Variable costs, on the other hand, are expenses that fluctuate based on the level of output, like raw materials or direct labor costs associated with production. By covering both categories, businesses provide themselves with a full view of financial health, ensuring sustainability.

Pricing strategies that only cover indirect costs, direct variable costs, or profit margins do not provide a comprehensive financial foundation, making it possible for the organization to operate at a loss in the long term. Thus, ensuring that prices at minimum cover both fixed and variable costs is essential for achieving overall financial viability and success.