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

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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)

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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

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?

• P = V/(1-Mp)

• P = \$200/0.40) = \$500

### You need to define, identify, and work with

• Fixed cost, Variable Cost, average cost per unit

• Breakeven Quantity

• Markup on Selling Price

• Any questions?