Why WE need to know the difference between a variable cost and a fixed cost

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# Why WE need to know the difference between a variable cost and a fixed cost - PowerPoint PPT Presentation

Why WE need to know the difference between a variable cost and a fixed cost. Ted Mitchell. To Calculate a Breakeven Quantity, BEQ. Breakeven Quantity, BEQ = (Fixed Cost, F ) /(Marginal Profit per Unit) BEQ = F /( Price Tag, P – Variable cost, V ) BEQ = F/(P-V)

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### Why WE need to know the difference between a variable cost and a fixed cost

Ted Mitchell

To Calculate a Breakeven Quantity, BEQ
• Breakeven Quantity, BEQ = (Fixed Cost, F) /(Marginal Profit per Unit)
• BEQ = F/(Price Tag, P – Variable cost, V)
• BEQ = F/(P-V)
• Remember it is NOT (Price tag – the average cost per unit)
• Price tag is the marginal revenue, P, want to use the marginal cost, V, to establish the marginal profit per unit sold
You need to know
• 1) What is the marginal profit per unit sold?
• Price Tag, P – Variable Cost, V
• Marginal Profit Per unit = P-V
• 2) The marginal cost is the Same as the Average Cost Per Unit (Unit Cost)
• Average Cost per Unit =
• (Total Variable Cost, COGS + Total Fixed Cost, F)/ Quantity sold, Q
• Average Cost per Unit = (COGS +F)/Q
What are 3 Ways to set a selling price?
• The three C’s of Pricing
• 1) Cost Based Based
• 2) Competitor Based
• 3) Customer (Demand) Based
• To know Cost Based Approached you must know the difference between variable cost, V, an average cost and a Fixed Cost, F
You need to be able to calculate
• a ratio called the Markup on Selling Price, Mp
• Markup on Price, Mp = (Price, Tag, P – Variable Cost, V)/Price Tag, P)
• Mp = (P-V)/P
• Remember it is the variable cost, V, not the average cost per unit
• Cost Based Pricing FormulaPrice Tag, P = (Variable cost, V)/(1 – Mp)
• P = V/(1-Mp)
Example
• If you purchase a wagon to be sold in your store with a markup on the selling price of Mp = 60% and it cost you V = \$200
• What is the selling price the customer must pay?