One more example before we move on.
Company D sells a product whose variable cost per unit are $40.
Total fixed cost for the year are $400000.
The company anticipates selling 10000 units.
What price must Company D charge to break-even?
Again, take a few minutes, give it a try,
then come back and we'll see how you did.
I'll meet you at the light board. Race ya.
Did I beat you? I hope so.
Gosh, this is getting tiring all the time.
Each time we take a turn,
it gets more and more tiring.
But boy, this is a lot of fun.
Let's see what we have. We're taking a,
take a look at our facts over here.
We're looking for a price that will cause us to break even,
given all of these other facts.
So let's take these facts,
let's go to our handy profit formula.
I'll plug in the data,
and then we'll be able to solve for
that break-even price and figure out what we need to chart.
Okay, so our revenue as we know are
the number of units that we're selling times the price that we're charging.
So we've got 10000 units times the price which we don't know yet,
that's what we're solving for.
But that would give us our revenues,
and then we'd subtract our variable costs.
So that would be the number of units that were selling,
10000 times the $40 per unit variable cost,
then we subtract out our fixed cost of $400000,
and all of that has to equal to zero.
We're trying to breakeven here.
Okay. So let's rearrange a few things.
I'm going to bring this on down here with this 10000 units times price,
and then I'm going to take everything else over to the other side of this equation.
We'll see the $400000 in fixed cost go over to the right.
That's a negative, so it's going to become a positive,
it has to flip signs to be able to move across that equal sign.
Then we have this variable cost,
10000 units times $40 per unit.
That's another $400000.
Again, that negative becomes a
positive if it wants to jump over to the other side of the equal sign.
So now, what we have is a situation where
we're looking for... All right, I'm going to take...
I'm going to add these together and then I'm going to take this
10000 over to the other side and divide that side by the 10000.
So we've got $800000 that we're trying to cover,
and we're selling 10000 units.
So what we want to do is set a price that given that we're selling 10000 units,
is high enough to cover both the fixed cost and the variable cost for those 10000 units.
So that price then would be $80.
We set a price of $80 per unit,
we will exactly break even. Terrific!
