Now, it's your turn to practice. Here's the example. Company E sells a product in two models. The basic model has a price per unit of $100 and variable cost per unit of $60. The deluxe model has a price per unit of $120 and variable cost per unit of $100. Its typical sales mix is 75% basic models and 25% deluxe models. Total fixed costs for the year are $105,000. How many basic and deluxe units must Company E sell to break even? Take a few minutes, give it a try, then come back and we'll see how you did. [SOUND] [SOUND] Okay, let's take a look at the last your turn example that we have here for this week. We are looking at data for our basic model where we have a price of $100, variable cost of $60 so that is a contribution margin of $40 per unit. And then our deluxe model we have $120 price, we have variable cost of $100. So that's a $20 contribution margin per unit. Our organization incurs, $105,000 and fixed cost, and the typical sales mix that we see is 75% of the units that we sell are our basic model, and 25% of those units are our deluxe model. Now, what we are trying to figure out is, how many of the basic models and the deluxe models do we need to sell In order to break even? So, let's think about how we do that. Recall, that if we've got multiple products in a situation, rather than just put one product, and we are using CDP analysis, we need to be able to make the assumption that the sales mix stays constant. So, we're going to make the assumption that we are always selling 75% of the basic model, and 25% of the deluxe model. And in doing that, we can calculate the average contribution margin per unit. So that would be our first step. So I'm going to do that right here. The average contribution margin per unit. 75% of our models are basic and they have a contribution margin of $40. And 25% of our models are deluxe, and they have a contribution of $20. So the average contribution margin per unit is $35. Okay, let's move over here and let's substitute in what we can substitute. Before I do any substitution though, I'm going to rearrange a little bit. Okay, let's rearrange in to price minus variable cost per unit. Times our quantity. Minus our fixed cost, is equal to our profit, and here all we're trying to do is sell enough to break even, so I'm going to put our profit in here at 0. And notice that this price minus the variable cost is a contribution margin per unit. Times the quantity, minus the fixed cost, is equal to 0. So I'm going to substitute in what we know now. We're looking for the number of units. So, I'm not going to substitute anything there, but our average contribution margin per unit is this $35. And our fixed costs are $105,000, and we're shooting for break even. So our break even quantity is the $105,000 fixed cost divided by $35 average contribution margin per unit. So we need to sell 3,000 units in order to break even. But remember, the original question with was, how many of the basic model and how many of the deluxe model do we need to sell to break even? Well, we know we need to sell 3,000 units at an average contribution margin at $35 per unit, to break even. This is an average contribution margin and this is a total number of units. Well, our sales mix, recall, we assume to stay constant at 75% basic model, 25% deluxe model. So out of these 3,000 units, 75% of them need to be basic models. And then, of our 3,000 units, 25% of them need to be deluxe. So, if we sell 2,250 basic models at $100, and 750 deluxe models at $120, then we will exactly break even. I think that might be a relatively straight forward for you by this point. This was definitely the more difficult one that we tackled in the your turn segments, but here's the next challenge for you. What I'd like for you to do, is to spend a little bit of time and prove to yourself that this number of basic units and this number of deluxe units does indeed lead us to a break even situation, or profit of equal to 0.
