Digital Displays Inc. makes computer monitors and sells them for $320 each. To break even, it needs to sell 545 monitors per month. If the fixed costs are $8,800 per month, what is the variable costs per monitor?

1) Cost includes the fixed cost (independent of number of units made) and variable cost (changes with the number of units produced).

2) Breakeven happens when the cost incurred and revenue generated are equal.

3) Total revenue generated = $320 x 545 = $174,400 = total cost.

4) Total variable cost = total cost - fixed cost = $174,400 - $8800 = $165,600

5) Variable cost per unit = total variable cost/number of units = $165,600/545 = $303.85.

Expert Answers

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The cost of a product is derived from the fixed and variable costs. The fixed costs are there, irrespective of the number of devices produced. Such costs may include, the rent of the premises, salaries of the employees, insurance premiums, interest payments, etc. Variable costs are dependent on the number of devices made. They include categories such as the cost of individual components, labor cost, transaction fees, and utility costs.

For the breakeven to happen, a certain number of devices have to be sold at a particular price so that the fixed cost and the variable costs are covered. Here the total variable cost is determined as the product of the variable cost per unit product multiplied by the breakeven number of units.

In the current case, the fixed cost is $8800. The variable cost per unit is to be determined. It is given that the breakeven will take place if 545 units are sold for $320 each.

Breakeven point in units = fixed cost / (sales price per unit - variable cost per unit)

Substituting the relevant values, as given in the question, we get:

545 = 8800/ (320 - variable cost per unit)

on simplification, we get:

320 - variable cost per unit = 8800/545

or, variable cost per unit = 320 - 8800/545 = $303.85

Thus, the variable cost per unit is $303.85.

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