A restaurant is considering adding fresh brook trout to itsmenu. Customers would have the choice of catching theirown trout from a simulated mountain stream or simply ask-ing the waiter to net the trout for them. Operating thestream would require $11,925 in fixed costs per year. Variable costs are estimated to be $6.80 per trout. The firmwants to break even if 900 trout dinners are sold per year.

What should be the price of the new item?

Selling price = $20.05

Explanation:

The break even point is the level of activity where the total cost of is exactly equal to the total revenue. At this point, the business makes no profit and no loss, because the total contribution is also equal to the total fixed costs.

Contribution is the excess of sales revenue over variable cost

Total contribution = (S.p - VC per unit) × unit sold

So we can determine the selling price per unit by equating the total contribution to the the total fixed cost as follows:

Step 1

Determine the total contribution

= ( S.P - 6.80) × 900

Step 2

Equate the total contribution to the total fixed cost and solve for S.P

(S.P - 6.80) × 900 = 11,925.    Lets substitute S.P with x

(X-6.80) ×  900 = 11,925

900X -6,120 = 11,925

900X =  11,925 + 6,120

900X = 18045

X = 18,045/900

X = $20.05

Selling price = $20.05

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