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?
Marketing Mix Decisions
and inputs
Managers Weekly Salary
$610
Not significant
Number of Servers to Hire/Fire
20 servers
Service and Product
Quality
Server Hourly Wage
$9.00
Not Significant
Price Tag for a Medium Cup
$3.50
Price
Type of Newspaper Ad
General Awareness,
$200 per day
Promotion Mix
Number of Daily Radio Spots
$40 per spot
Promotion Mix
Hours of Operation
8 am-10 pm, 70 hrs
Place and Time Mix
Quality of Coffee
Best, $6 per pound
Product Mix
Pounds of Coffee
40 pounds
No Role
Number of Cups
20,000 medium cups logo? Not significant
with Logo
The 4P’s can be a Variable Cost or a Fixed Cost
What Type of Cost are
these?
Managers Weekly Salary
$610
?
Number of Servers to Hire/Fire
20 servers
?
Server Hourly Wage
$9.00
?
Price Tag for a Medium Cup
$3.50
?
Type of Newspaper Ad
General Awareness,
$200 per day
?
Number of Daily Radio Spots
$40 per spot
?
Hours of Operation
8 am-10 pm, 70 hrs
?
Quality of Coffee
Best, $6 per pound
?
Pounds of Coffee
40 pounds
?
Number of Cups
20,000 medium cups ?
with Logo
The 4P’s can be a Variable Cost or a Fixed Cost
Type of Cost
Managers Weekly Salary
$610
fixed
Number of Servers to Hire/Fire
20 servers
fixed
Server Hourly Wage
$9.00
fixed
Price Tag for a Medium Cup
$3.50
Customer cost
Type of Newspaper Ad
General Awareness,
$200 per day
fixed
Number of Daily Radio Spots
$40 per spot
fixed
Hours of Operation
8 am-10 pm, 70 hrs
Fixed and Variable
Quality of Coffee
Best, $6 per pound
variable
Pounds of Coffee
40 pounds
variable
Number of Cups
20,000 medium cups variable
with Logo
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 Formula
Price 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?