Four important costs impact a firm’s pricing decisions:

(a) total cost, or total expenses, the sum of the fixed costs and variable costs incurred by a firm in producing and marketing a product;

(b) fixed cost, the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold;

(c) variable cost, the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold; and

(d) unit variable cost, the variable cost expressed on a per unit basis.

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point is the quantity at which total revenue and total cost are equal. Assuming no change in price, if the costs of a firm’s product increase due to higher fixed costs (manufacturing or advertising) or variable costs (direct labor or materials), then its break-even point will be higher. And if total cost is unchanged, an increase in price will reduce the break-even point.