Question

Activity 13.3 - Price Calculation – Breakeven Pricing Often a firm will calculate the break-even point for a price. That is, if we set the price at $X, then how many units will we need to sell to cover costs (that is, our break-even point). Work through the following two examples to gain a better understanding of this approach. Fixed Costs = $10,000 Variable Costs = $10 Using break-even analysis calculate: 1. How many units need to be sold to break-even if the product is sold for $40? 2. How many units need to need to be sold to break-even if the product is sold for $25? Activity 13.4 - Price Calculations - Marginal Analysis Fixed Costs are $10,000 and Variable Cost per unit is $10 Price Unit Sales Total Revenue Total Variable Cost Gross Profit Total Production Cost = Total Variable Cost + Fixed Costs = Price X Unit Sales = Variable cost per unit x Unit Sales = Total Revenue - Total Production Cost $60 500 $50 1,000 $40 1,500 $30 2,000 $20 2,500

Answer 1

13.3

1.

Units needed to be sold to break even

= Fixed cost/Contribution margin per unit

Contribution margin per unit = Selling price - Variable costs

= 40 - 10 = 30 per unit

= 10,000/30

= 333 units.

2.

Contribution margin per unit = 25 - 10 = 15

Units needed to Breakeven = 10,000/15

= 667 units