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

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

The 4P’s Have a Direct Impact on the Amount Customers Demand for that particular week?

The 4P’s can be a Variable Cost or a Fixed Cost

The 4P’s can be a Variable Cost or a Fixed Cost

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?
- Answer? Mp= (P-V)/P
- 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?

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