Question

Scenario

Imagine it is 2021 and cannabis is now legal in NZ and the government has altered the regulations to allow the production and sale of edibles. Being the budding entrepreneur that you are, you decide to hold a ‘wake and bake’ sale of weed brownies, in the Massey student union as a social event for students.

Fixed Costs

You need to cover the costs of your kitchen and an employee. For the sake of this exercise, let us assume that your co-worker Mary-Jane works a set number of hours every week — 5 hours—and that you pay her $20 per hour including all taxes and benefits. You rent the kitchen for $100 per week, and that price includes all the equipment and utilities. Those costs are not going to change no matter how many brownies you sell. If you baked nothing, you would still need to pay $100 per week in rent and $100 per week in wages. Those are your fixed costs. Fixed costs do not change as the level of production goes up or down.

Your fixed costs are $_____ per week.

Variable Costs

Now you need to buy ingredients for the brownies. Once you add up the food costs of making a single large batch of brownies, you find that it is a total of $379.20 for a batch of 12 dozen (144) brownies. If you divide that out, you can tell that each brownie costs $___.___ in food costs.

i.e. ($______ / _____ brownies = $____._____).

In other words, every brownie you sell is going to have a variable cost of $___.____. Variable costs do change, as production is increased or decreased.

Break-even

Now let’s assume that you have set your price and you need to know your break-even quantity (or volume). You are an exceptional marketing student, so you have talked to the people who are likely buyers for your brownies, and you understand what is a bargain price and what price is too expensive. You have compared the price with competitor prices. Also, you have considered the price of your brownie compared to the price of beer and spirits (both are “substitutes” for your product).

All of this analysis has led you to set a price of $12 per brownie, but you want to make sure that you don’t lose money on your business: You need to calculate the break-even quantity (or volume). The formula to do that is the following:

Break-even volume (or quantity) =    __ fixed cost___

                                                                     (Price – Variable costs)

What is your break-even volume (or quantity)?  

Break-even volume = $____ / ($____ – $___.___)

Break-even volume = $____ / $__.__

Break-even volume = ___.___ brownies

Answer 1

Fixed cost

Fixed costs are the costs that need to be paid irrespective of the sales made.

Here the fixed cost is Kitchen rent ($ 100 per week) and the wages ($ 100 per week)

Total fixed cost is 100+100 = $ 200 per week

Variable Cost

Variable cost is dependent on the number of brownies nade. Here, 144 brownies costs $379.2

Variable cost per brownie = Total variable cost / Number of brownies

Variable cost per brownie = 379.2/144 = $2.63 per brownie

Break Even

Break Even Volume = Fixed Cost / (Price - Variable Cost)

= 200/(12-2.63)

=200/9.37

=21.34 brownies