Question

1. Emma owns an Internet business where she sells weatherproof car floor mats. Her monthly fixed costs are $40,000. The average price per unit is $25 and the average variable cost per unit is $15. What is her break-even point?

Remember that your answer will be in “units,” not “dollars,” as you are finding the number of items that need to be sold in order to break even.

2. Andrew rents rooms in his hotel for an average of $92 per night. The variable cost per rented room is $37. His fixed costs are $52,000 per month. How many rooms does he have to rent per month in order to break even?

In this case when you do the calculations, your answer will not be a whole number – there will be a decimal. In break even calculations, you must always round your answer up to the next highest whole number, because you cannot sell a fraction of an item and if you round down, you will not have sold enough to break even. So even if calculate your answer to be 12.05 units, you would round up to 13 units.

Now, let’s try to break down the various costs business owners have into Fixed Costs and into Variable Costs. You may want to re-read the Lecture and/or the textbook to refresh your memory on this one.

Julia owns a sub sandwich shop and has the following costs each month:

• Labor costs (management & workers) = $7,000
• Insurance = $900
• Rent = $800
• Utilities = $300
• Average cost of ingredients/packaging for each sub = $1.15

Once you have classified them into FIXED and VARIABLE costs, complete the following:

3. Julia sells subs for $6 each. How many subs will she need to sell to break even each month based on the costs listed above?

4. In order to make that break even number more manageable, Julia has found a new meat and vegetable distributor that can lower the average cost of ingredients/packaging down to $0.95 per sub. If all of the other costs remain the same, what would the new break-even point be?

5. Julia decides to reposition her sub shop as “upscale” with fresher meats and vegetables, along with premium packaging for the subs. Her new price point is $10 per sub, but her variable costs have risen to $4.22 per sub. If all other costs remain the same, what is the break-even point now?

Answer 1