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)

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

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

Ted Mitchell


To calculate a breakeven quantity beq
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
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 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


The 4p s can be a variable cost or a fixed cost1
The 4P’s can be a Variable Cost or a Fixed Cost


What are 3 ways to set a selling price
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
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
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
You need to define, identify, and work with

  • Fixed cost, Variable Cost, average cost per unit

  • Breakeven Quantity

  • Markup on Selling Price

  • Any questions?