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$610Not significant Number of Servers to Hire/Fire20 serversService and Product Quality Server Hourly Wage$9.00Not Significant Price Tag for a Medium Cup$3.50Price Type of Newspaper AdGeneral Awareness, $200 per day Promotion Mix Number of Daily Radio Spots$40 per spotPromotion Mix Hours of Operation8 am-10 pm, 70 hrsPlace and Time Mix Quality of CoffeeBest, $6 per poundProduct Mix Pounds of Coffee40 poundsNo Role Number of Cups20,000 medium cups with Logo logo? Not significant

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/Fire20 servers? Server Hourly Wage$9.00? Price Tag for a Medium Cup$3.50? Type of Newspaper AdGeneral Awareness, $200 per day ? Number of Daily Radio Spots$40 per spot? Hours of Operation8 am-10 pm, 70 hrs? Quality of CoffeeBest, $6 per pound? Pounds of Coffee40 pounds? Number of Cups20,000 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/Fire20 serversfixed Server Hourly Wage$9.00fixed Price Tag for a Medium Cup$3.50Customer cost Type of Newspaper AdGeneral Awareness, $200 per day fixed Number of Daily Radio Spots$40 per spotfixed Hours of Operation8 am-10 pm, 70 hrsFixed and Variable Quality of CoffeeBest, $6 per poundvariable Pounds of Coffee40 poundsvariable Number of Cups20,000 medium cups with Logo variable

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?