Help solving this math problem

Question

Your business provides a service to local residents. Your fixed costs are $2,000 per month, and you expect 40 customers per month. The variable cost associated with each service is $35.

 

1. Using cost-based pricing and a markup of 20%, what should the price be? Show calculations.

2. Using breakeven analysis, what should the break-even volume of production be? Hint the formula is Break-even volume = Total fixed costs / (Price – Average variable cost). Note: This formula needs manipulated algebraically to be able to solve for price. Show calculations.

3. Using target costing, a price you think is acceptable to customers ($99) and an acceptable profit margin (20%), what should the price be? Hint the formula is Target cost = cost customers are willing to pay – acceptable profit margin to obtain the desired cost. Show calculations.

Answer 1

Karen,

a)Total cost = 2000 + 40(35) = $3,400

Total revenue = 3400(1.2) = $4,080

Price per customer = 4080/40 = $102

b) break-even according to Wikipedia means cost=revenue.

=> break-even price = (total cost)/(quantity produced)=3400/40 =$85, sort of. Good luck with the rest of it.